Presented below are selected qualitative characteristics of accounting information.
1. Relevance
2. Neutrality
3. Verifiability
4. Timeliness
5. Faithful representation
6. Comparability
7. Understandability
Instructions
For each of the following situations, indicate which qualitative characteristic was violated.
(a) Allen Ltd. reported its merchandise inventory at a net realizable value of $25,000. The company’s auditors disagree with this value and estimated the net realizable value to be $20,000.
(b) Owens Corporation does not issue its annual financial statements for the year ended December 31, 2013, until December 2014.
(c) Silver Mining Ltd. is the only company in the mining industry that uses the straight-line method to depreciate its mining equipment.
(d) Chapman Ltd. switches inventory cost formulas from average to FIFO and back to average in a three-year period.
(e) Enco Ltd. intentionally recorded revenue in 2013 for sales made in 2014 to ensure that management would receive their bonuses, which were based on profits.
(f) World Talk Corporation used terminology in its financial statements and notes to the financial statements that is not commonly used in financial reporting and did not provide explanations of the terminology.
(g) Precise Ltd., a multinational drilling company, reported separately its paper, paper clips, and pens in the balance sheet rather than reporting a single line item for office supplies. Total office supplies were $5,000.
(h) Community Health Foods Ltd. signed a legal agreement to finance the purchase of equipment. The agreement required annual payments of $15,000 for five years. The agreement referred to the payments as rental payments. The company records rent expense when the annual payments are made.
SOLUTION
(a) 3 Verifiability
(b) 4 Timeliness
(c) 6 Comparability
(d) 6 Comparability
(e) 2 Neutrality
(f) 7 Understandability
(g) 1 Relevance
(h) 5 Faithful representation