Qualitative Characteristics of Accounting Information

This article discusses the qualitative characteristics of accounting information, including understandability, relevance, comparability, reliability, and faithful representation. It also explores the role of the Australian conceptual framework in enhancing the quality of accounting information. The case study of Reject Shop Company is used to illustrate these concepts.

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION 1
STUDENT NAME
STUDENT ID NO.:
UNIT NAME:
UNIT CODE:
TUTOR’S NAME:
ASSIGNMENT
NO.:
ASSIGNMENT
TITLE:
DUE DATE:
DATE
SUBMITTED:

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION 2
Reject shop company is an Australian based company that deals with store chain which was
established in 1981 and at the moment it has more than 340 stores in Australia.it deals with
general merchandize goods such as toiletries and household goods.
SALES EBITDA EBIT NPA DIVIDENTS EPS
0
5
10
15
20
25
30
35
40
45
50
% CHANGE
% CHANGE
The above chart shows a general change in various elements with regard to reject chop in 2018.
The market values of other assets like land tend to vary from one year to the other because they
increase in their market value. They should therefore be revalued so that their real carrying value
at the year-end is determined. This exercise will ensure that the company prepares their financial
statements in their true and fair values with regard to their assets. It also assists the users make
some decisions based on the truthfulness of financial statements. Revaluation will help the
company know the actual carrying amount of assets.so therefore the accountant is right on the
revaluation of such land so that the correct value is captured in the books.
Australian conceptual framework highlight key features of a good accounting information and
recognition of some elements in the statements (Wagenhofer, 2009, pg. 76). Australian
conceptual framework highlights some basics of financial statements like aims of the statements,
characteristics and recognition technique (Christensen, 2010, pg. 291).

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION 3
prefix “Aus” is inserted to show the difference from IFRS.
Roles of the Australian conceptual framework.
 Helps Australian accounting standards board in the amendments of different accounting
standards to enhance quality of accounting information.
 Brings out harmonization in different rules and regulations that guides the presentation of
accounting information.
 It assists various accountants in utilization of various standards such as Australian
accounting standards in the preparation and presentation of accounting information.
 It helps auditors in the generation of judgements relating to the preparation and
presentation of financial statements and if such statements have been prepared in line
with relevant standards.
 It simplifies the interpretation of accounting information since it presents it in a uniform
way making it easier to be interpreted.
Understandability means that the information presented should be in a form that can be easily
understood by a common user. It should be free from ambiguity and complex figures that are not
understandable by the users.
Relevance means that the financial statements must be useful to the need of the user for
purposes of decision making (Karğın, 2013, pg.73). It helps in predicting future structures and
arrangements of the company based on past performance. Therefore, presentation of elements
like dividend payout, salary payment and prices of shares should be well highlighted so that it
can be relevant to investors (Nobes &Stadler, 2015, Pg. 591).
Comparability simply implies that the information presented are easy to compare for instance
previous, current and future results regarding a particular item (Yip &Young, 2012, pg.1770).
financial information therefore should refer to the same period of time to be comparable for
instance 2nd July of 2017 and 2018.companies in the same industry should present information in
a comparable format for users to easily make comparison.
Reliability means information is free from errors and possible misstatement of facts. Relevance
of information does not necessarily mean it is reliable. This could be due to the recognition
method used which could be misleading. A good example is the amount of damages regarding a

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION 4
pending case. This value must not be recorded in full since it will show a wrong image regarding
the earnings of the company. Users might not draw relevant information from this reports.
Faithfull representation means that truth should prevail with regard to preparation of financial
statements. Assumptions and accounting estimates used should be well disclosed. Presentation of
items like assets, equities and liabilities must be presented in a truthful manner and recognition
method should be understandable and acceptable. Untruthful presentation might arise because of
wrong measurement criteria and recognition. Where there is difficulty regarding recognition and
measurement, relevant disclosures of possible errors should be provided (Macintosh, 2009, pg.
150).
Prudence concept. according to the concept, revenues of the company should not be
overestimated and also expenses should not be underestimated. This concept requires that
revenue recognition only happen when you are certain of their inflows (Barker, 2015, pg. 515).
recognition of sales revenue and other revenues in pg.37 of the annual reports clearly shows that
the accountants have utilized the concept of prudence. Sales revenue of 2018 and 2017 differ
with a slight amount of $ 6286 million, this shows a fair figure. Expenses have been also listed
properly and with minimal differences (Kirschenheiter &Ramakrishna, 2010). A specific element
resulting from expenditure is not clearly shown but a prudent accountant provides a reasonable
amount for such in expectation for such. Accountants should therefore be familiar with uncertain
economic conditions they operate in such as probability of collecting debts and life expectancy
of assets. This will therefore involve application of their judgement and experience in the field.
Understandability characteristics is clearly shown since various elements in the statements are
accompanied with notes which shows underlying assumption, workings and any other relevant
information. For instance, under note 19. Regarding contingent liabilities, it is clearly stated that
the company has no contingent liabilities as at 1st July 2018., note 25 highlight key issues relating
to dividends. These accompanying notes therefore brings the feature of understandability into
play.net income after tax is also shown clearly to be $16.5 and 12.3 in 2018 and 2017, this is
easy to understand by common user.
Comparability quality is shown in the half year financial report pg.2 where it is stated that Sales
grew by 1.1% from $432.9m to $437.6m against the prior corresponding period. the term
‘corresponding’ means the statements are comparable from the previous period. This shows that

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION 5
reject shop limited prepares its reports in line with good features set. This will enhance the
comparability of different items in the statement which relate to same reporting time. Financial
statement of reject company shows some net earnings after tax of $16.5 and $12.3 million in
2018 and 2017 consecutively. This profits relates to the same period which enhances
comparison. Users can therefore compare this earnings and carry draw relevant decision out of it
(Cascino & Gassen, 2010).
faithful representation is portrayed in the statements of Reject shop where they have shown how
they have arrived at various accounting judgements.it has been disclosed in pg.42 of 2018 annual
report that financial report has been prepared using the historical cost method. This is a key
disclosure necessary to make key decision by the user.it is further indicated that judgement
regarding some estimates has been utilized with regard to useful life of assets. Further they have
disclosed that depreciation is to be calculated using straight line method.
Prudence is an important concept in accounting that implies use of judgement regarding
treatment of some accounting estimates. Reject shop has adhered to this concept as shown in the
way they have arrived at the useful life of computers, vehicles, fixtures with useful life
expectancy of 3,3-5 and 5-12 respectively. This is shown in pg.43 of 2018 annual report.
(Yurisandi & Puspitasari, 2015, pg. 645). judgement is arrived at using capitalization rates.
Provisions under note.12 of liabilities with a figure of $ 10,564,000 and $ 9,757,000 in 2018 and
2017 utilized the concept of prudence. (Shortridge & Smith, 2009, pg. 11).
Reject shop company has shown clearly every element regarding their obligations like
borrowings of $ 13000,000 in 2017 and 0 in 2018.this shows that the statements are very reliable
to the user and give every aspect of information it requires. It further lists net assets of the
company of $ 150,986,000 and $ 135,153,000 in 2018 and 2017 respectively. This reliability of
the statement will aid the user make relevant investment decision. (Lim, Lee, Kausar & Walker,
2014, pg. 270).
Relevance is portrayed since the company prepares and present their annual reports yearly with
their financial period ending 2nd July each year. This indicates that the statement is prepared with
the interests of the user in mind. This presentation will aid the user anticipate the declaration of
the performance of the company at a particular time. Under note.17 of 2018 annual reports,
dividends paid are presented to be $6926000 and $12409000 in 2018 and 2017 respectively. This

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION 6
information is relevant to potential investors. Shareholders can therefore predict the dividends
for the next year.
security market reaction to the announcement of shares announced to the shareholders will
impact on the value of shares. For instance, Reject company announced to shareholders that they
have made a net profit of $ 16.6 million in the annual report of 2018.security market therefore
will react to this announcement since the company will declare dividends to shareholders in
proportion of their shareholding. The declaration of earnings will also make potential investors
have appetite to invests in the company. (Lee & Masulis, 2009, pg. 450). Performance of the
company is shown in the profit and loss account and the balance sheet and earnings are disclosed
for a company that is publicly quoted. This is to give adequate information to current and
potential investors of the company. It also gives good information to the security market which
tend to influence the share price either to rise or fall. (Mlonzi, Kruger, & Nthoesane, 2011,
pg.150). This is clearly depicted in the annual reports of Reject shop where they announced the
total number of shares issued to be 326,700 in 2017. Dividends paid under note.17 of (6,926)
(12,409) is also disclosed which is in line with good presentation of financial reports. Basic and
diluted earnings per share of reject company is shown as 57.4 and 42.8,56.7 and 42.4 cents
respectively. These is a key information that is very relevant to the investors to make relevant
investment. (Booth, Kallunki, Sahlstro, & Tyynela, 2011, pg.230).
in the ideas of Cready& Gurun (2010), low earnings lead to rise in the market values while
Hussin et al. (2010) established that minimum earnings bring negative reaction in the market.
disclosing the share prices of the company and the profitability will impact on the stock prices
either positively or negatively (Hoggett et al, 2014).
In conclusion, good accounting statement that meets the needs of the user must portray the above
features so that it can be useful to the user. It must be prepared and presented in a form that is
easy to understand and give a true information that is relevant and reliable to the user.

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION 7
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QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION 8
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