1. 1.01 Generally Accepted Accounting Principles – Qualities of Accounting Information
GAAP PowerPoint #2

2. Hierarchy of Qualitative Information
Understandability
Decision Usefulness
Relevance
Predictive Value
Feedback Value
Timeliness
Reliability
Verifiability
Neutrality
Representational Faithfulness
Comparability and Consistency
Cost/Benefit (discussed in PPT #3)
Click on agreement, select yes
Page 18 will contain the diagram above
Materiality (discussed in PPT #3)

3. Objectives of Financial Information
To provide useful, understandable information to users of financial statements for decision making
For present and potential investors and creditors and other users in making rational investment, credit, and similar decisions
To help present and potential investors and creditors and other users to assess the amounts, timing, and uncertainty of prospective cash receipts
To inform users about the
economic resources of an enterprise;
the claims to those resources (obligations);
the effects of transactions, events, and
circumstances that cause changes in resources and claims to those resources

4. Objectives of Financial Information
Decision usefulness
the quality of being useful to decision making
Understandability
users must understand the information within the context of the decision being made

5. Primary Qualities of Accounting Information
Relevance
Definition: relating to the matter at hand
Reliability
Definition: the quality or state of being reliable; and the extent to which an experiment, test, or measuring procedure yields the same results on repeated trials

6. Relevance
Capable of making a difference in the decision making of the user
Must have predictive or feedback value
Predicts or forecasts for users about the outcome of events of a company
Provides feedback value for users to confirm or correct prior expectations of a company
Must be presented in a timely manner
Provides current information to users to help with decision making

7. Reliability Must be verifiable Must be a faithful representation
Able to be proven; not subject to opinion
Must be a faithful representation
Agreement between the accounting numbers and supporting documentation
Must be reasonably free from error
No mistakes or inaccuracies should be found in the financial statements
Must be reasonably free from bias; should be neutral
Accounting information should not favor any groups or companies but be a true and factual representation of a company’s financial position.

8. Secondary Qualities of Accounting Information
Comparability
Definition: The quality of information that enables users to identify similarities in and differences between two sets of economic phenomena.
Consistency
Definition: Conformity from period to period with unchanging policies and procedures.
Information about a particular enterprise gains greatly in usefulness if it can be compared with similar information.

9. Comparability
The purpose of comparison is to detect and explain similarities and differences.
Accounting information should be comparable across different companies and over different time periods.

10. Consistency
Consistent use of accounting principles from one accounting period to another enhances the utility of financial statements to users.
A quality of the relationship between two accounting numbers

11. Questions for Understanding and Discussion
Explain the concept of the FASB’s conceptual framework. (Slide 2)
What is the primary objective of financial accounting?
Explain relevance and reliability of financial statements.
What are the components of relevant information?
What are the components of reliable information?
Why should financial statements be both comparable and consistent?