Two primary qualitative characteristics of financial statements area)Understandability and materiality.b)Relevance and reliability.c)Relevance and understandability. d)Materiality and reliabilityCorrect answer is option 'B'. Can you explain this answer?

Question

Answer

The following are all qualitative characteristics of financial statements:

Understandability - The information must be readily understandable to users of the financial statements. This means that information must be clearly presented, with additional information supplied in the supporting footnotes as needed to assist in clarification.

Relevance - The information must be relevant to the needs of the users, which is the case when the information influences the economic decisions of users. This may involve reporting particularly relevant information, or information whose omission or misstatement could influence the economic decisions of users.

Reliability - The information must be free of material error and bias, and not misleading. Thus, the information should faithfully represent transactions and other events, reflect the underlying substance of events, and prudently represent estimates and uncertainties through proper disclosure.

Answer

Qualitative Characteristics of Financial Statements

Financial statements are the primary means of communicating financial information to stakeholders. The financial information in these statements should be relevant, reliable, comparable, and understandable.

Relevance and Reliability

The two primary qualitative characteristics of financial statements are relevance and reliability.

Relevance

Relevance means that the financial statements contain information that is useful for decision-making purposes. Financial information is relevant if it can influence the economic decisions of users. For example, information about revenue, expenses, and profitability is relevant to investors, creditors, and other stakeholders in determining whether to invest in a company or lend it money.

Reliability

Reliability means that the financial statements are free from material errors and bias and can be depended on by users. Financial information is reliable if it is complete, accurate, and verifiable. For example, the balance sheet should accurately reflect the company's assets, liabilities, and equity, and the income statement should accurately reflect the company's revenues and expenses.

Conclusion

In conclusion, relevance and reliability are the two primary qualitative characteristics of financial statements. These characteristics are essential for providing users with useful information for decision-making purposes.

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