Accounting Online Program Certification Practice Test

Which of the following comments on accounting conventions is correct?

1. Financial information must be both relevant and representationally faithful

2. All physical assets must be reported, regardless of value

3. Materiality specifies items based on their monetary value

4. Both comments are correct

The correct answer is: Financial information must be both relevant and representationally faithful

The statement that financial information must be both relevant and representationally faithful captures two fundamental characteristics of useful financial reporting. Relevance ensures that the information provided is capable of influencing the decisions of users by helping them evaluate past, present, or future events. Representational faithfulness means that the financial information accurately depicts the economic phenomena it purports to represent, ensuring that it is complete, neutral, and free from error. In contrast, the notion that all physical assets must be reported regardless of value does not align with the principle of materiality, which distinguishes between information that is significant enough to affect a decision and that which is immaterial. This principle emphasizes that only items that could influence a user's economic decisions should be recognized and reported. The comment regarding materiality indicating that it specifies items based on their monetary value is somewhat misleading, as materiality also considers qualitative factors alongside monetary thresholds. Therefore, it is not entirely accurate to define materiality solely in monetary terms. Overall, the correct answer emphasizes the critical criteria, relevance, and representational faithfulness, making it the most appropriate choice in the context of accounting conventions.