Environmental and Theoretical Structure of Financial Accounting

1 Environmental and Theoretical Structure of Financial Accounting Qualitative Characteristics 1.

The two main qualitative characteristics of accounting information are relevance and reliability. When the accounting information possesses these two characteristics, it is considered useful for the process of designing strategies and making decisions. Relevance refers to the ability of the information to contain significant information that will be used to predict the future and make plans accordingly. Reliability refers to the accuracy and the truthfulness of the information provided in the financial statements (Spiceland et al., 2020).

2.

No. GAAP does not require companies to state the forecasts of their financial variables in their financial statements. This is directly related to the two qualitative characteristics of accounting information: relevance and reliability. Companies are not required to disclose forecasts of financial variables to external variables to external users by GAAP because it is not reliable; the information cannot be used as an accurate representation of the company’s present or future standing.

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2 It is also not a relevant representation of the organization’s financial position; it cannot be used for decision making isnce it does not contain the type of information that is used to deduce the future of the company.

Cost Effectiveness 1.

The GASB must follow a certain outlined process to revise an accounting standard. The constraints of accounting are the factors that hinder the provision of full and accurate accounting information. For financial statements to be considered relevant and useful, they must adhere to the principles outlined in the Generally Accepted Accounting Principles (GAAP). The constraints that are applicable to the FASB’s consideration that determines whether it will be necessary for companies to provide any additional information are; materiality, costeffectiveness, consistency and conservatism. Any new information must meet these conditions because they determine whether the information meets the required standards.

2.

These constraints are discussed in three Concepts Statements. These are; Concept Statement 6, Concept Statement 7 and Concept Statement 8.

3.

Occasionally, accounting standards are revised by the relevant accounting bodies to enhance the clarity, accuracy and relevance of the accounting information provided to users. The process of revising an accounting standard involves several cost implications (Spiceland et al., 2020). These costs include payments to accountants to study and analyze the new proposed accounting standard, the costs of extracting the data, and the extra sums of money paid to the

3 preparers of the financial statements for retrieving additional data and applying it on the financial statement.

4.

The FASB performs a Cost-Benefit Analysis (CBA) to assess whether the benefits of the proposed accounting standard revision outweigh its costs. Some of the benefits include increased investor confidence, enhanced relevance and accuracy of information, and the growth of the organization as a result of applying the new standard. When the benefits significantly outweigh the costs, it is considered a worthwhile revision. However, if the costs outweigh the benefits, the revision is not worthwhile.

Revenue Recognition of Money Paid 1.

I disagree with position of the owners of Wolf Company. According to GAAP, income is recognized when it is earned and not necessarily when the payment is received. Thus an advance payment can only be considered as revenue in the books when the period for which it has been paid lapses.

2.

There is mounting pressure for the gaps between GAAP and IFRS to be eliminated. The main difference between the two accounting standards is their approach to recording and reporting financial information. GAAP is based on rules and regulations, while IFRS is based on principles. Converging GAAP and IFRS has its pros and cons.

3.

The arguments for converge are; firstly, it will make accounting information clear to all users internationally. Secondly, it will lead to the simplification of accounting information, thus

4 making it easier and faster for users to make judgments and decisions from it. Thirdly, it leads to greater transparency and reliability of the accounting information (Wild, 2020).. Fourthly, using the same accounting standards will enhance the comparability of financial information among different countries.

The arguments against convergence are the reluctance of countries to adopt different accounting practices than what they have used for several years. Secondly, converging accounting standards is a costly process is a costly process and also takes a lot of time.

4.

As the world continues to become globalized, the US should converge with IFRS because it will enhance the understandability, shareability and comparability of financial information among different countries. This will also be very beneficial for multinational organizations that have divisions in the US and across the world.

5

References Spiceland, J., Nelson, M. & Thomas, W. (2020). Intermediate Accounting (10Th Ed.). McGraw Hill Higher Education.

Wild, J. (2020). Fundamental Accounting Principles. McGraw-Hill US Higher Ed USE.