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:

1. a) Provide one example where information is relevant but not faithfully represented. (3 marks,

   maximum 100 words)

2. b) Provide one example where information is not relevant but is faithfully represented. (3 marks,)

   maximum 100 words)

3. c) Provide one example where information is relevant and faithfully represented. (4 marks,

   maximum 150 words

Answer 1

a)Information is relevant but not faithfully represented:

EXAMPLE : Overstatment of inventory in trading account if it is of cost $10,000 showing at $15,000.Here showing it under appropriate account is relevant in nature but showing it over than actual cost of inventory is not a faithfull representation.

b)Information is not relevant but faithfully represented :

EXAMPLE: Ifthe minimal part of the debt which is long term laiabilitiy is shown under current assets of $20 . Here $20 which belongs to longterm liabilities has shown under current liabilities which makes it irrelevant .But showing that $20 which is a very minute part of debt is called faithfull representation.

c)Information relevant and faithfull representation:

EXAMPLE:Showing the Common stock of the company at the cost of the stock or at net realisable value which ever is lower under assets.Here showing the stoch under current assets is relevant and the same stock recording at the price which is lower is faithfull represtation.