Conservatism involves reporting the least optimistic

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Unformatted text preview: pacity of information to affect a decision and is the first of two primary qualities of accounting information • Reliability - verifiable, representationally faithful, and neutral. Accrual accounting - revenues are recognized when earned and expenses when incurred, regardless of the receipt or payment of cash • Historical cost - values from actual transactions that have occurred in the past aka transactions- based accounting • Fair values - estimates of the current economic value of an asset or liability. Materiality - the magnitude of an omission or misstatement of accounting information that in the light of surrounding circumstances makes it possible that the judgement of a reasonable person relying on the information would be changed or influenced by the omission or misstatement. Conservatism - involves reporting the least optimistic view when faced with uncertainty in measurement. • Conservatism reduces both the reliability and relevance of accounting information in at least two ways o Understates both net assets and net income o Results in selectively delayed recognition of good news in financial statements • Unconditional conservatism - a form of conservative accounting that is applied across the board in a consistent manner. Conditional conservatism - refers to the adage of recognize all losses immediately but recognize gains only after they are realized. Limitations of Financial Statement information • Timeliness - • Frequency • Forward looking o Recognition lags - where certain business activities a...
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