1. The two fundamental qualitative characteristics financial information must ha
ID: 2595188 • Letter: 1
Question
1. The two fundamental qualitative characteristics financial information must have to be decision useful are: A. Relevance and Reliability B. Relevance and Faithful Representation C. Faithful Representation and Predictive Value D. Predictive Value and Relevance E. None of the above. 2. Prepayments occur when: A. The cash flow precedes either expense or revenue recognition. or revenue recognition precedes the cash flow. C. All transactions and events have been analyzed, corrected, and journali D. Future must be estimated to comply with the accrual accounting model E. None of the above. What three situations require adjusting entries at the end of each reporting period? A. Estimates, cash flows, and accruals B. Cash flows, operating activities, and estimates C. Prepayments, accruals, and estimates D. Operating activities, estimates, and accruals 3. E. None of the above. Basic limitations of the balance sheet include: I. II. Many items in the balance sheet are heavily reliant on estimates and judgments rather 4. The company's book value does not directly measure the company's market value. than on determinable amounts. The balance sheet does not convey information about the company's liquidity or long- term solvency III. Which of the above statements are true? A. I only B. II only C. III only D. I and II only. E. I, II, and III are all true.Explanation / Answer
1) Answer: B. Relavance and faithfull representation
These two are characterized as the fundamental qualitative characteristics of financial reporting information. It also includes the timelieness, verifiability etc .
2) Answer: A. Cash flows preceds either revenue or expense recognition.
It happens when the cash payments shall be made prior to the actual recognition of expenditure in the books.
3) Answer: C Prepayments, estimates and accruals require adjusting entries at the end of the year at the time of closure of accounts.
4) Answer: B
One of the major limitation of balance sheet is that it is highly reliant on the estimates and judgements rather than determinable amounts. Other limitations include recording at historical cost, omission of valuable items.
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