DIESTRO, ROCHELLE MAE D.

AC301

Enumerate and discuss the following:

1. Components/ingredients of faithful representation

 Completeness
- Refers to the inclusion of all information necessary for a user to comprehend
the transactions being shown, including all necessary descriptions and
explanations. The financial statements provide all of the information that a
user requires to get a clear picture of a company's results, financial status,
and cash flows. This also implies that no information is left out that could lead
a user to generate a negative impression of the business.
 Neutrality
- This term refers to the absence of bias in the selection or interpretation of
financial information. Financial information isn't neutral if it's been chosen or
presented in a way that makes it easier to make a decision or make a
judgment in order to accomplish a specific result or outcome. Neutrality does
not imply that knowledge has no meaning or has no impact on behavior.
Because both are incompatible with the idea of neutrality, information must
report in a faithful and trustworthy manner without modifying anything that has
to be transmitted for the intention of influencing someone's action in order to
be considered neutral.
 Free from error
- Indicates that there are no mistakes in the description of the impacts of
accounting records and circumstances, and that the process used to generate
the reported data was chosen and applied without errors. The financial
statements should be clear of inaccuracies so that the information they
include gives an accurate overview of the business. If a succession of "errors"
tends to tilt the financial statement results in one aspect, it may be termed
financial reporting fraud or fraudulent or deceptive, making the financial
statements untrustworthy and weak in terms of their relevance.
2. Qualitative characteristics of financial statements per Conceptual Framework

Qualitative characteristics are either fundamental or enhancing, depending on

how they affect the decision-usefulness of information. Each qualitative characteristic,
regardless of classification, contributes to the decision-usefulness of financial reporting
information. However, there is a financial reporting constraint that prevents relevant
financial information from being provided: the expense of a reporting practice should not
outweigh the benefits. Based on how they influence the utility of financial information, it
can be classified as fundamental (relevance and faithful representation) or enhancing
(comparability, verifiability, timeliness, and understandability). However, it is constrained
in providing valuable financial information by two pervasive constraints which is cost
and relevance.
Fundamental is the most important qualitative characteristic that is linked to
economic phenomena, and it should be examined before the other qualitative
characteristics. After determining which economic phenomena should be portrayed
using relevance, faithful representation will identify which features best relate to the
relevant phenomena. As a result, relevance and faithful representation must combine to
offer users with valuable financial information.
Enhancing qualitative characteristics is an extra benefit to the essential to
improve the decision-making use of financial information. As a result, the four key
features of comparability, verifiability, timeliness, and understandability should be widely
applied. However, improving qualitative characteristics will be ineffective if financial
information is irrelevant or not accurately represented in the fundamental step.

3. Enhancing characteristics of financial statements per Conceptual Framework

The four enhancing qualitative characteristics continue to be timeliness,

understandability, verifiability and comparability.

Understandability
 Information should be easy to comprehend for people who may want to evaluate
and use it. This can be improved by properly classifying, describing, and
presenting information in a clear and concise manner so that people can
comprehend its significance. Financial statement users are presumed to have
sufficient understanding to correctly analyze the data.
Comparability
 • Comparability is defined as the level of knowledge that allows people to see
differences and similarities in two sets of economic phenomena. It refers to how
consistently accounting standards and procedures are applied from one period to
another. Also describes the ability with which a company's financial statements
may be compared to those of other companies.

Verifiability
 It pertains to how or whether information can be validated in a way that ensures
consumers that it is both credible and reliable, ensuring that the information
adequately describes what it essentially means and that the measurement
technique employed is unbiased and error. When several experienced evaluators
or observers agree and reach the same conclusion, the information is verified.

Timeliness
 Timeliness refers to how rapidly accounting information is rendered available to
users. The less timely, the less beneficial it is for making decisions. Accounting
information must be timely since it competes with other information. It refers to
the time it takes for information in annual reports to be revealed. It's commonly
expressed as the number of days it takes the auditor to approve the accounts
after book-year end.