Chapter 2, Problem 17CE

To determine

Concept Introduction:

Conceptual framework versus cost constraint- The conceptual framework of accounting explains the objectives and concepts for reporting financial information. It helps the accountants in providing the financial information which is most useful for existing as well as potential investors, lenders and other creditors. The qualitative characteristics of useful information is divided into two categories:

1. Fundamental qualitative characteristics which includes relevance and faithful representation.
2. Enhancing qualitative characteristics which includes comparability,verifiability, timeliness and understandability.

However, these characteristics are subject to cost constraints, so the benefits to the users of information must justify the cost incurred by the entity.

Requirement 1:

To specify the qualitative characteristic or constraint that is most suitablewhen a financial item that may be useful to investors is not required to be reported because the cost of measuring and reporting this information is judged to be too great.

To determine

Concept Introduction:

Relevance: An information is relevant if omission or misstatement of such information can change a business decision and helps the users of information in predicting future events or confirming or correcting any past predictions.

Requirement 2:

To specify the qualitative characteristic or constraint that is most suitable when timely information that is used to predict future events or provide feedback about prior event.

To determine

Concept Introduction:

Comparability: It states that a financial information is useful if information of one company is comparable with another company’s similar information or it is comparable within same company with different time-period.

Requirement 3:

To specify the qualitative characteristic or constraint that is most suitable when a quality of information that enables an analyst to evaluate the financial performance of two different companies in the same industry.