Problem 2-1 REVIEW QUESTIONS

1. Why is it that financial statement users need to at least have a basic knowledge of
accounting concepts?
 Since accounting concepts are the basic assumptions, rules and principles it can
help the users to achieve the objective and to have the qualitative characteristics
of financial statements. Because accounting concept work as the basis of
recording the business transactions and preparing accounts (financial statements).
2. Why are the GAAP important?
 Because Generally Accepted Accounting Principles (GAAP) guides accountants
in measuring, recording, and reporting financial activities of an enterprise or
business also to have a fairly representation of financial statements.
3. What are the main implications of going concern concept?
 It served as the guideline of a business that allows the reader/user of its financial
statements to suppose that the business will continue to operate and perform its
obligations, objectives and commitments.
4. Enumerate and discuss the four qualitative characteristics of financial statements.
 1. Understandability – the information in financial statements should be presented
clearly so that the reader can easily comprehend it.
 2. Relevance - the information in financial statements should have the impact in
decision making of someone/user. Because the timeliness of the information can
help the user to evaluate the past, present and future events of a business.
 3. Reliability - the information in financial statements should be trustworthy.
Because it can use by the interested parties or some investors that can use
consistently.
 4. Comparability - the information in financial statements should be comparable
across the different firms and time periods or economic events.
5. Differentiate “comparability” from “consistency.”
 Comparability is the process of comparing the two companies base on their status
while consistency is the continual use of the same accounting policy with the
change allowed only when justified.
Problem 2-2 TRUE OR FALSE
Instruction: In the space provided before the statement, write TRUE if the statement is correct
or FALSE if the statement is incorrect.
TRUE 1. The main objective of GAAP is to present fair financial statements.
FALSE 2. The performance and economic status of the business are reported in the accounting
financial statements.
FALSE 3. Financial reports are useful in making an economic decision only if their contents are
fully understood.
FALSE 4. Conservatism is an accounting convention that requires prudence.
FALSE 5. Timeliness is an important element of financial statements “comparability” quality.
TRUE 6. Comparability provides relevance if it enables users to identify similarities and
differences between two or more sets of economic circumstances.
FALSE 7. Balance sheet explains the changes of cash and cash equivalents during an accounting
period.
FALSE 8. The components of the cash flow statement contain all assets items of the balance
sheet.
TRUE 9. Two million is always material for accounting purposes.
TRUE 10. Neutrality is an application of the principle of fairness.