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Lecture 2

lecture 2 - chapter 2-3.docx

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Kathy Falk

Chapter 23Why do we need accountingObjectiveprovide info that is decision useful eg help allocate capitalresource allocation decisions include assessment of management stewardship management role in maximizing shareholder valueWhat kind of info is usefulThe Fundamental Qualitative Characteristics are1RelevanceMakes a difference in a decisionHas predictive and feedbackconfirmatory value2Representational FaithfulnessComplete include all relevant info materialityexcluded info means not requiredNeutral cannot favor one group of stakeholders over othersReasonably free from error or biasShould tell us real economic numbers of firm and what is really going onEnhancing Qualitative Characteristics are1Comparability Information measured and reported in similar way company to company and year to yearAllows users to identify real economic similarities and differencesHow depreciation is donestraight line etc2 VerifiabilitySimilar results achieved if same methods are used3Timeliness 4UnderstandibilityAllows reasonably informed users to see the significance of the informationProvides enough information so that it is clearFinancial infonot too messy and easily understandableTradeOffsFundamental qualitative characteristics relevance and representational faithfulness should be present in financial statements It is not always possible to have all the enhancing qualitative characteristicsTradeoffs happen when one qualitative characteristics is sacrificed for another eg adoption of a new standardConstraintsMaterialityif info will change a users decision it is material If the information would change the judgement of a reasonable person then it is considered material eg lawsuitHow to decide what to include or notQuantitative guidelines eg 5 of income from continuing operations is considered material that should be includedProfessional judgementCost versus BenefitsBenefits of using the informationcosts of providing that information eg more timely information will cost moreAssets have three key characteristics
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