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Chapter 2

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Ryerson University
ACC 100
Else Grech

Chapter 2 Reliability has four basic characteristics Verifiability Information is verifiable when we can make sure that it is free from error for example by looking up the cost paid for an asset in a contract or an invoice Representational faithfulness Information is representationally faithful when it corresponds to an actual event such as when the purchase of land corresponds to a transaction in the companys recordsis neutral when it is not slanted to portray a companys position in a better or Neutrality Informationworse light than the actual circumstances would dictate such as when the probable losses from a major lawsuit are disclosed accurately in the notes to the financial statements with all their potential effects on the company rather than minimized as very remote possible losses Conservatism Information that is uncertain should be presented so that assets and revenues are not overstated while liabilities and expenses are not understated Care is needed here to avoid the creation of bias as a result of being conservative Various accounting rules are based on the concept of conservatism For example inventory held for resale is reported on the balance sheet at the lower of cost and market value This rule requires a company to compare the cost of its inventory with the market price or current cost to replace that inventory and report the lower of the two amounts on the balance sheet at the end of the year In Chapter 6 we shall more fully explore the lower of cost and market rule as it pertains to inventoryThe quality that makes accounting information dependable in representing the events that it Reliabilitypurports to representthe quality that allows a user to analyze two or more com Comparability For accounting informationpanies and look for similarities and differencesDepreciation The process of allocating the cost of a long term tangible asset over its useful life Also termed amortization Consistency For accounting information the quality that allows a user to compare two or more accounting periods for a single companyThe magnitude of an accounting information omission or misstatement that will affect the Materialityjudgment of someone relying on the information Operating cycle The period of time between the purchase of inventory and the collection of any receivable from the sale of the inventory
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