QUALITITATIVE

CHARACTERISTICS
FUNDAMENTAL CHARACTERISTICS
❖ Relevance
Predictive value
Confirmatory value
Materiality – entity specific
❖ Faithful Representation
Completeness – adequate disclosure
Neutrality – free from bias, prudence/conservatism
Free from Error
Enhancing Characteristics

❖ Verifiability
❖ Comparability
❖ Consistency
❖ Understandability
❖ Timeliness
❖ Cost Constraint – Pervasive constraint
Exercises
❖ Qualitative characteristics
a. Are considered either fundamental or enhancing
b. Contribute to the decision usefulness of financial reporting information
c. Distinguish better information from inferior information for decision making purposes
d. All of the choices are correct

❖ Accounting information is considered relevant when it:

a. Can be depended on to present the economic conditions and events that it is intended to
represent
b. Is capable of making a difference in a decision
c. Is understandable by reasonable informed users of accounting information
d. Is verifiable and neutral
Identification
❖ What is the quality of information that gives assurance that it is free of error and
bias?
Faithful representation

❖ The accounting information is directed toward the common needs of users and is
independent of presumptions about particular needs and desires of specific users.
Neutrality

❖ In the event of conflict between economic substance of a transaction and the

legal form, the economic substance shall prevail.
Substance over form (Faithful representation)
Identification
❖ This characteristic is exhibited when information about two different entities
engaged in the same industry has been prepared and presented in similar manner.
Comparability

❖ It is demonstrated when a high degree of consensus can be secured among

independent measurers using the same measurement method.
Verifiability

❖ An entity issuing the annual financial reports within one month after the end of
reporting period is an example of this enhancing qualitative characteristic.
Timeliness
Identification
❖ This characteristic assumes that users have a reasonable knowledge of business
and economic activities and review the information with reasonable diligence.
Understandability

❖ The benefit of the information must be greater than the cost providing of it.
Cost-benefit constraint

❖ An entity applies the same accounting treatment to similar events from period to
period.
Consistency

❖ The capacity of information to influence a decision.

Relevance
Objectives of Financial Statements

❖ Provide financial information about an entity’s assets, liabilities, equity, income and
expenses that is useful in:
Assessing future cash flows to the entity
Assessing management stewardship of the entity’s economic resources
❖ Financial statements
Statement of Financial Position
Statement of Financial Performance
Statement of Changes in Equity
Statement of Cash Flows
Notes to Financial Statements
REPORTING ENTITY

❖ SINGLE ENTITY
Sole proprietorship, partnership, corporation
❖ PORTION OF AN ENTITY
Segment
❖ MORE THAN ONE ENTITY
Parent and Subsidiary, Joint Ventures
TYPES OF FINANCIAL STATEMENTS

❖ CONSOLIDATED FINANCIAL STATEMENTS

Parent and subsidiary as one reporting entity
❖ UNCONSOLIDATED FINANCIAL STATEMENT
Parent alone
❖ COMBINED FINANCIAL STATEMENT
Two or more entities not linked with parent and subsidiary
GOING CONCERN

❖ Indefinite/unlimited life
❖ Implicit assumptions
Accounting entity
Time period
Monetary unit
 EXERCISES
❖ An accounting entity is viewed as continuing in operation in the absence of evidence the to the
contrary.
❖ Going concern

❖ The parent entity in Manila has a subsidiary in Japan. The financial statements of the subsidiary
are translated to pesos for consolidation with the financial statements of the parent entity at
year-end.
❖ Accounting entity

❖ A company decided to publish financial statements only in the years when it had good news to
report.
❖ Time period

❖ A machine bought from the USA for $1,000 is recorded in the journal at P50,000 hen the
exchange rate of the US dollar to the Ph peso was $1=P50.
❖ Monetary unit