Question

1. ‘Relevance’ and ‘reliability’ represent two key qualitative characteristics of accounting information. What do these two terms mean in an accounting context? Are they in conflict?

2. Name an alternative to historic cost for measuring asset values and explain why the alternative method would be used.

3. Consider the characteristics of a well-established company that is operating successfully in its market. Explain whether the expected net cash flows from the three activities (operating, investing, financing) would be inflows or outflows.

Answer 1

Ans.1

Relevance- Relevance in accounting sense meaning is the information represented through financial statements which consist of Balance Sheet, Profit & Loss, and Cash Flows Statements should be relevant to its stakeholders. The data and information should be useful and timeliness of information for the decision making of Investors, Government, Vendors, and other stakeholders only then it is called Relevance in Business otherwise it is irrelevant and of no use in Business.

Reliability - In terms of accounting, reliability of any accounting and financial information means the authenticity, the true and fairness of any available information to users. For example- when a company publishes its results to its stakeholders, it must be audited by Auditor as per regulations, then it becomes the Audited Financial Statements that are trustworthy and can be deemed as reliable because they are audited by Independent Auditor. Therefore, the information must be reliable also.

Ans2.

The alternative to Historical Cost methods are-

Current Cost/ Replacement Costs: In the replacement cost method, we charge the cost which is paid to acquire the assets in the business. For example- Building acquired should not be recorded as its Historical method the old value but should be recorded if we purchase that building as of now, that amount is called Replacement Cost. Traditional methods like Historical Costs are now no more of use, now present value, replacement value should be used for valuation purposes in businesses.

Ans.3

Net Cash Flows in a successful company would depend on its structure of the business, how its business is financed, and what is the nature of operations of Business.

In Operating Activities - Cash flows are generated from normal course of business running operations, working capital changes. So, There can be net Inflows from Business activities if there are all good conditions in operations of business & no working capital crunch is there.

Investing Activities- Deals with investment in plant & machinery, fixed assets of a business. Like- Machinery purchased for Business purposes. So there can be outflow also it for running a business in a good manner, every business needs capital assets.

Financing Activities- Deals with the financial structure through which finance for business is raised. Whether it is raised through equity or through debt. How much repayment is to be made & how much is received through the issue of stock.