Define relevance and its components. What is an example of financial reporting information
that has both of these components?
Relevance means it is capable of making a difference in user's decision
making. It can have confirmatory value (confirm or correct prior
expectations) or predicti...
Best Grades | Must Pass | Latest Update | Correct Answers | 2024/ 2025
ACC 356 Exam 1 Questions and Correct
Answers | Latest Update
Define relevance and its components. What is an example of financial reporting information
that has both of these components?
Relevance means it is capable of making a difference in user's decision
making. It can have confirmatory value (confirm or correct prior
expectations) or predictive value (help predict future outcomes). Revenue
has both of these components.
Define representational faithfulness and its components.
A depiction of an item in the financial statements faithful ly represents
what it purports to represent. This means it must be complete, neutral, and
free of material error.
What characteristics enhance usefulness of the financial statement item?
Comparability: allows users to detect and explain similarities and
differences
Verifiability: ability to ensure that info represents what it purports to represent (or without
bias)
Timeliness: Information is available before it loses capacity to make a difference
Understandability: Info can be understood (Enron example)
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Financial reporting should provide information...
About the economic resources of an enterprise, the claims to those
resources, and the effects of transactions, events, and circumstances that
change resources and claims to those resources
Financial reporting should provide information that help capital providers assess:
1. Amounts, timing, and uncertainty of prospective net cash inflows to the
firm
2. Management's ability as a steward of resources
Why accrual accounting?
Accrual accounting more closely tracks the occurrence of transactions and
other events and circumstances that have affected the entity's wealth
during the period
What are the important elements of the FASB's definition of an asset?
1. Probable future economic benefits
2. Arisen from a past transaction
3.Entity can control (obtain benefits and prevent others from accessing those benefits)
What are the important elements of the FASB's definition of a liability?
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1. Probable future sacrifice
2. Transaction or obligating event has already occurred
3. Little or no discretion to avoid the future sacrifice as present obligations
What are important elements of the FASB's definition of an expense?
1. No probable, controllable future benefits or
2. They cannot be measured in a relevant and reliable way
What is a constructive liability? Give an example.
It may not be enforceable legally, but based upon customs, social norms,
or past behavior. Example is a yearly bonus.
What is the FASB's definition of owners' equity?
The residual interest in assets after liabilities have been subtracted.
How did FASB deal with uncertainty over future resource inflows and outflows in the definition
of assets and liabilities?
They use "probable" to modify future benefits in the definition of an asset
and future sacrifices in the definition of a liability
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