INFORMATION ABOUT ENTITY’S ECONOMIC RESOURCES AND CLAIMS

1. Information About Entity’s Economic Resources and Claims

 Balance Sheet
 Predict enterprise’s ability to generate cash and cash equivalents in the future
 Assess the entity’s liquidity and solvency as well as its need to additional financing and how
successful it is likely to be obtaining that financing

2. Information about the Financial Structure

 Predicting future borrowing needs and how future profits and cash flows will be distributed
among those with interest in the enterprise

3. Information about Solvency and Liquidity

 Predicting the ability of the enterprise to meet its financial commitments as they fall due

INFORMATION ON CHANGES IN ECONOMIC RESOURCES AND CLAIMS

1. Financial performance reflected by accrual accounting

 Statement of Comprehensive Income

 Assess potential changes in the economic resources that the enterprise is likely to control in the
future
 Predict the capacity of the enterprise to generate cash flows from its existing resource base
 Forming judgments about the effectiveness with which the enterprise might employ additional
resources

2. Financial performance reflected by past cash flows

 Statement of Cash Flows

 Indicates how the entity obtains and spends cash that may affect the entity’s liquidity and
solvency
 Understand the entity’s operations and evaluate its financing and investing activities

3. Changes in the entity’s economic resources and claims not resulting from financial performance

 Changes in market prices or interest rates that affect the entity’s ability to generate net cash
inflows
 Completely understand why the entity’s economic resources and claims changed and the
implications of these changes for its financial performance
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

I. FUNDAMENTAL

1. Relevance – can affect the decision or evaluation of the user

a. Feedback / Confirmatory Value

 Confirm earlier expectations about the enterprise, thus, allowing users to better
understand how past economic activities have affected the enterprise

b. Predictive Value

 Formulate more intelligible predictions about the future

 Historical information is used as a basis for forecasts of performance and other matters
which users may need in analyzing price movements of securities, dividend and wage
payments, and ability to meet obligations as they come due

c. Materiality

 A matter of professional judgment based on identifiable circumstances

 An entity-aspect and no quantitative threshold has been set by the IASB to determine
when an item is material
 Depends on: (1) nature of the item; (2) magnitude of the items to which the information
relates; (3) error judged in particular circumstances of omission or misstatement of
information
 An item is material if its inclusion or disclosure would make a difference in the
evaluation of the user of financial statements

2. Faithful representation – requires that the amounts and descriptions of information presented in the
financial statements reflect the actual results of the transactions completed by the enterprise

a. Completeness

b. Neutrality

 Impartial and is not biased

 Prudence – exercise of caution when making judgments

c. Freedom from error

 No error in its description and no error committed in the process of producing

information

II. ENHANCING

1. Verifiability

2. Comparability
  Identify similarities and differences between at least two sets of economic
circumstances


3. Understandability

4. Timeliness