Question

The fundamental qualitative characteristics that financial information must possess to be useful to the
primary users of general purpose financial reports—identified in the Conceptual Framework are
‘relevance’ and ‘faithful representation’.
Required:
a) Provide one example where information is relevant but not faithfully represented. (3 marks,
maximum 100 words)
b) Provide one example where information is not relevant but is faithfully represented. (3 marks,
maximum 100 words)
c) Provide one example where information is relevant and faithfully represented. (4 marks,
maximum 150 words)

Answer 1

a) X ltd. sold 500 books to Y bookseller in the year 2018 costing $100 each. In the first week of 2019, Y bookseller returns 50 of these books on grounds of defective items. The sale recorded by X ltd in its financial statements is $50,000. In this case the information is relevant as the sale did happen of 500 books but it is not faithfully represented because sales returns were not taken into account.

b) A company is showing book value of a tradable security at historical price. The information might be faithfully represented in the books of accounts but is of no use to the user of information as the fair market value of the asset is not recorded, which is more relevant.

c) A company records all of its assets based on the revaluation method and discloses all the relvant information. For Example. Recording a sale by taking into consideration all the sales returns, allowances and making a provision of bad debts