Generally Accepted Accounting Principles
in the United States

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Qualitative Characteristics
of Accounting Information

(SFAC No. 2)

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SFAC No. 2

Statement of Financial Accounting Concepts (SFAC) No. 2
        a.  Qualitative Characteristics of Accounting Information
        b.  Issued in May 1980

A Hierarchy of Accounting Qualities

Most important characteristics of information
            --> Usefulness for Decision Making

User-Specific Qualities
               a. Understandability
             Information is not useful
             -->  if it is not understandable.

Primary Decision-Specific Qualities
               a. Relevance
             --> Capacity to make a
                   difference in a decision

                b. Reliability
             --> Information is reasonably
                   free from error and bias.

     Ingredients of Relevance
               a. Predictive value
             --> increases the likelihood of
                   forecasting the outcome of events.

                b. Feedback value
             --> enables users to confirm or correct
                   prior expectations.

                c. Timeliness
             --> makes information available
                   before it loses its capacity
                   to influence decisions.

     Ingredients of Reliability
               a. Verifiability
             --> ability to ensure that
                   information represents
                   what it purports to represent

                b. Representational faithfulness
             --> information represents
                   what it purports to represent

                c. Neutrality
             --> absence of bias
                   to attain a predetermined result

     Secondary and Interactive Qualities
               a. Comparability
             --> enables users
                   to identify similarities and differences

               b. Consistency
             --> Conformity from period to period

     Threshold for Recognition
               a. Materiality
             --> Magnitude that influences the judgment
                   of a reasonable person
                   who relies on the information

     Pervasive Constraint
            --> Benefits > Costs

Other Statements of Financial Accounting Concepts (SFAC)


Issue Date
1 Objectives of Financial Reporting by Business Enterprises November 1978
2 Qualitative Characteristics of Accounting Information May 1980
3 Superseded by SFAC No. 6  
4 Objectives of Financial Reporting by Nonbusiness Organizations December 1980
5 Recognition and Measurement in Financial Statements of Business Enterprises December 1984
6 Elements of Financial Statements December 1985
7 Using Cash Flow Information and Present Value in Accounting Measurements February 2000

U.S. GAAP Codification
International Financial Reporting Standards (IFRS)
Accounting Topics
Inventory Valuation Methods
Depreciation Methods
Revenue Recognition Principle
Accrual Basis vs. Cash Basis Accounting
Basics of Journal Entries
Ratios for Financial Statement Analysis
Overview of Financial Statements

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