State examples for each case of relevance and representational faithfulness.
Explanation of Solution
Reliability is a characteristic of accounting as it relates to the extent of accuracy of the amount that are reported by an organization. All the amounts recorded in the financial statement are duly supported by evidences. Example: If an organization records assets at their acquisition and not their current market price then, the amount reported is not reliable.
Relevance is another characteristic of accounting and it can be explained as an attribute that has the capacity to impact the decision of the user's to financial statements. Example: Valuation of asset should incorporate all the amounts including acquisition cost and subsequent developments.
Examples for each of the following scenario:
- Reporting at historical cost (reliable and relevant): Amount of accounts receivables.
- Reporting at historical cost (reliable but not relevant): Acquisition of intangible assets at appreciated values.
- Reporting at fair market value (reliable and relevant): Marketable securities.
- Reporting at fair market value (relevant but not reliable): Internal valuation of intangible assets by a company.
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Chapter 2 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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