GAAP Lists and Describes the Qualitative Characteristics That Make Accounting

question 15

Essay

GAAP lists and describes the qualitative characteristics that make accounting information useful for decision-making purposes. The FASB viewed the characteristics as a hierarchy of qualities that make accounting information useful. The FASB stated that accounting information must possess both relevance and faithful representation qualities to be useful, but it was noted that relevance and faithful representation may conflict with each other in some instances. For example, to increase relevance, faithful representation may have to be sacrificed, or vice versa.
Required:
a. Define "relevance" and "faithful representation" and list the components or "ingredients" of each quality.
b. Give an example in financial accounting that illustrates the following tradeoffs:
1) Relevance is sacrificed in order to make accounting information more reliable.
2) Faithful representation is sacrificed in order to make accounting information more relevant.

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Definitions:

Operant Conditioning

A learning process through which the strength of a behavior is modified by reinforcement or punishment.

Classical Conditioning

A learning process that occurs when two stimuli are repeatedly paired; a response that is at first elicited by the second stimulus is eventually elicited by the first stimulus alone.

Spontaneous Recovery

A phenomenon in learning and conditioning where a previously extinguished response re-emerges after a period of no exposure to the conditioned stimulus.

Unconditioned Response

An automatic, natural reaction to a stimulus that occurs without prior learning or conditioning.