accounting information must be relevant and also faithful representation a) how can this supposedly turn out...

accounting information must be relevant and also faithful representation
a) how can this supposedly turn out to be a balancing act(juggling both relevance ans faithful representation)
b) give an example of an accounting concept where relevance exists but lacks faithful representation

Expert Solution

(a) Relevance is one of the decision-specific characteristics of useful accounting information. Relevant information is capable of making a difference in a decision. Information with no bearing on a decision is irrelevant and the information should also be timely in order to be considered relevant.

Faithful representation means that the numbers and descriptions match what really existed or happened. To be a faithful representation, information must be complete, neutral, and free of material error. It is basically the concept that financial statements produced must accurately reflect the condition of a business.

According to conceptual framework , information is said to be useful when it is relevant and represents faithfully what it purports to represent. The usefulness is enhanced if it is comparable, verifiable, timely and understable.

(b) The given example perfectly suits the relevant characteristics but it lacks faithfull representation :

Forecasts of future operating results and projections of future cash flows may be highly relevant to some decision makers. However, they would not be as free from error as historical cost information about past transactions which shows the information is relevant for the decision taking but it is not faithfull as it is not free from errors and we can't be sure about the future forecasts.

ekkarill92 answered 2 years ago

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