Assumptions, principles, and constraints. Assumptions, principles, and constraints. Full disclosure principle. Accounting principles–comprehensive. Accounting principles–comprehensive. Conceptual framework–general. Conceptual framework–general. Objective of financial reporting. Qualitative characteristics. Revenue and expense recognition principles. Revenue and expense recognition principles. Expense recognition principle. Expense recognition principle. Expense recognition principle. Qualitative characteristics. Expense recognition principle.
The relevant criteria for assessing materiality will depend upon the circumstances and the nature of the item and will vary greatly among companies. For example, an error in current assets or current liabilities will be more important for a company with a flow of funds problem than for one with adequate working capital. The effect upon net income (or earnings per share) is the most commonly used measure of materiality. This reflects the prime importance attached to net income by investors and other users of the statements. The effects upon assets and equities are also important as are misstatements of individual accounts and subtotals included in the financial statements.
The auditor will note the effects of misstatements on key ratios such as gross profit, the current ratio, or the debt/equity ratio and will consider such special circumstances as the effects on debt agreement covenants and the legality of dividend payments. 2-6 Copyright © 2011 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only) Questions Chapter 2 (Continued) There are no rigid standards or guidelines for assessing materiality. The lower bound of materiality has been variously estimated at 5% to 20% of net income, but the determination will vary based upon the individual case and might not fall within these limits. Certain items, such as a questionable loan to a company officer, may be considered material even when minor amounts are involved.
The Homework on Expense Recognition
The production, sales, or cash receipts method can be used to assign revenues to periods of time. Expense recognition involves assigning or matching expenses to periods of time. Some expenses are closely related to the revenues assigned to periods of time. For example, the costs of goods sold during a period reflect the costs of materials, labor, and manufacturing overhead incurred to produce ...
In contrast a large misclassification among expense accounts may not be deemed material if there is no misstatement of net income. 6. Enhancing qualities are qualitative characteristics that are complementary to the fundamental qualitative characteristics. These characteristics distinguish more-useful information from lessuseful information. Enhancing characteristics are comparability, verifiability, timeliness, and understandability. 7. In providing information to users of financial statements, the Board relies on general-purpose financial statements. The intent of such statements is to provide the most useful information possible at minimal cost to various user groups.
Underlying these objectives is the notion that users need reasonable knowledge of business and financial accounting matters to understand the information contained in financial statements. This point is important; it means that in the preparation of financial statements a level of reasonable competence can be assumed; this has an impact on the way and the extent to which information is reported. 8. Comparability facilitates comparisons between information about two different enterprises at a particular point in time.
