1460T_c02.qxd 11:11:2005 09:45 Page 51Nishant-16 NIshant-16:Desktop:prakash 11/11: EQA Exercises·51 EXERCISES s (L04, E2-1 (Qualitative Characteristics)SFAC No.2 identifies the qualitative characteristics that make ac- 8) counting information useful.Presented below are a number of questions related to these qualitative char- acteristics 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 meas- urement,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 qual- itative 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 rele- vance.) (h)Predictive value is an ingredient of which of the two primary qualities that make accounting in- formation useful for decision-making purposes? ( 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.) (GjD 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,never- theless,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.) (L0 4)E2-2 (Qualitative Characteristics)The qualitative characteristics that make accounting information useful for decision-making purposes are as follows. Relevance Timeliness Representational faithfulness Reliability Verifiability Comparability Predictive value Neutrality Consistency Feedback value Instructions Identify the appropriate qualitative characteristic(s)to be used given the information provided below. (a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles. (b)Quality of information that confirms users'earlier expectations. (c) Imperative for providing comparisons of a company from period to period (d)Ignores the economic consequences of a standard or rule. (e) Requires a high degree of consensus among individuals on a given measurement. () Predictive value is an ingredient of this primary quality of information. (g) Two qualitative characteristics that are related to both relevance and reliability. (h)Neutrality is an ingredient of this primary quality of accounting information. () Two primary qualities that make accounting information useful for decision-making purposes p Issuance of interim reports is an example of what primary ingredient of relevance? (LO 5)E2-3 (Elements of Financial Statements)Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below. Assets Distributions to owners Expenses Liabilities Comprehensive income Gains Equity Revenues Losses Investments by ownersEXERCISES E2-1 (Qualitative Characteristics) SFAC No. 2 identifies the qualitative characteristics that make ac￾counting information useful. Presented below are a number of questions related to these qualitative char￾acteristics 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 meas￾urement, 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 qual￾itative 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 rele￾vance.) (h) Predictive value is an ingredient of which of the two primary qualities that make accounting in￾formation 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, never￾theless, 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.) E2-2 (Qualitative Characteristics) The qualitative characteristics that make accounting information useful for decision-making purposes are as follows. Relevance Timeliness Representational faithfulness Reliability Verifiability Comparability Predictive value Neutrality Consistency Feedback value Instructions Identify the appropriate qualitative characteristic(s) to be used given the information provided below. (a) Qualitative characteristic being employed when companies in the same industry are using the same accounting principles. (b) Quality of information that confirms users’ earlier expectations. (c) Imperative for providing comparisons of a company from period to period. (d) Ignores the economic consequences of a standard or rule. (e) Requires a high degree of consensus among individuals on a given measurement. (f) Predictive value is an ingredient of this primary quality of information. (g) Two qualitative characteristics that are related to both relevance and reliability. (h) Neutrality is an ingredient of this primary quality of accounting information. (i) Two primary qualities that make accounting information useful for decision-making purposes. (j) Issuance of interim reports is an example of what primary ingredient of relevance? E2-3 (Elements of Financial Statements) Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below. Assets Distributions to owners Expenses Liabilities Comprehensive income Gains Equity Revenues Losses Investments by owners Exercises • 51 (L0 4, 8) (L0 4) (L0 5) 1460T_c02.qxd 11:11:2005 09:45 Page 51 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11: