Reference no: EM131103269

1. (Qualitative Characteristics) SFAC No. 2 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and underlying constraints.

(a) What is the quality of information that enables users to confirm or correct prior expectations?

(b) Identify the two overall or pervasive constraints developed in SFAC No. 2.

(c) The chairman of the SEC at one time noted, "If it becomes accepted or expected that accounting principles are determined or modified in order to secure purposes other than economic measurement, we assume a grave risk that confidence in the credibility of our financial information system will be undermined." Which qualitative characteristic of accounting information should ensure that such a situation will not occur? (Do not use reliability.)

(d) Billy Owens Corp. switches from FIFO to average cost to FIFO over a 2-year period. Which qualitative characteristic of accounting information is not followed?

(e) Assume that the profession permits the savings and loan industry to defer losses on investments it sells, because immediate recognition of the loss may have adverse economic consequences on the industry. Which qualitative characteristic of accounting information is not followed? (Do not use relevance or reliability.)

(f) What are the two primary qualities that make accounting information useful for decision making?

(g) Rex Chapman, Inc. does not issue its first-quarter report until after the second quarter's results are reported. Which qualitative characteristic of accounting is not followed? (Do not use relevance.)

(h) Predictive value is an ingredient of which of the two primary qualities that make accounting information useful for decision-making purposes?

(i) Ronald Coles, Inc. is the only company in its industry to depreciate its plant assets on a straight line basis. Which qualitative characteristic of accounting information may not be followed? (Do not use industry practices.)

(j) Jeff Malone Company has attempted to determine the replacement cost of its inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristic of information is lacking in these data? (Do not use reliability or representational faithfulness.)