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Plz Give answer 4r it
01-11-2010, 09:39 PM
Post: #1
Plz Give answer 4r it
Please answer the following questions;

One of the constraints of conceptual framework for financial reporting, “Information is material if its omission or misstatement could influence the economic decisions of the users taken on the basis of the financial statements.”

1. Explain the statement in detail with examples.
2. In the context of the above statement, would you capitalize the following items in the accounts of a company? Discuss each item in detail.
a. A box file
b. A computer
c. A small plastic display stand
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01-12-2010, 02:02 PM
Post: #2
Material concept is the basic principle of accounting. Materiality varies from organization to organization. One item which is material for an organization may be not material for another organization. If you purchase a stapler machine with a useful life of more than one year then according to matching principle you can treat it asset to charge depreciation to income statement for the whole of it useful life. An outlay of Rs.5, 000/- may be immaterial for a profitable organization but it will be material for a small firm. Before capitalizing any item one should keep in mind the equity, total assets, operating income and profitability of an organization. You may say that the assessment of what is material is a matter of professional judgment. Many professional accountants use different percentages based on income, gross profit, assets and equity for capitalizing different items or recognizing what is material or immaterial for an organization.

Now we come on your question. If in the financial statement of a small firm an item which cost is say 5% of its net income is expense out then it mislead the user of information. Because it will result in overstatement of profit. Similarly an outlay regarding an item with a petty value but with a useful life of more than one year is capitalized in the financial statement of a big company then it will also cause misleading on the part of users of financial statements.

Box Files Although box files have a useful life of more than one year but in the financial statement of a company it will not be appropriate to capitalize cost of a file. But if the cost of files is material or a huge cost has incurred on their purchase further there are reasonable ground that they have useful life of more than one year than they can be capitalized. However it will immaterial for even a small organization to capitalize the cost of a single file

A Computer A computer should be capitalized in each and every case because it has a useful life of more than one year. Furthermore the material concept deals with the small items where the question of profession judgment regarding taking an item as asset arises. Contrarily a computer is considered a confirmed asset.

A Small Display Stand The description of item shows that it has no much valuable item. The treatment of this item shall be based on professional judgment. In a company with huge equity and assets this shall be treated asset otherwise it shall be expensed out.
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