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Q.1-3CA_7

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Intermediate Accounting (Kieso)
Found in: Page 23

Short Answer

Question: Economic consequences of accounting standard-setting means:

(a) standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard.

(b) standard-setters must ensure that no new costs are incurred when a new standard is issued.

(c) the objective of financial reporting should be politically motivated to ensure acceptance by the general public.

(d) accounting standards can have detrimental impacts on the wealth levels of the providers of financial information

Answer

Option (d) will be the correct answer.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Accounting Standards

The accounting standards are a uniform set of procedures and guidelines that aim to bring uniformity to different individuals’ and entities' accounting policies and practices.

Step 2: Explanation for the correct option

Economic consequences of accounting standard-setting mean that it can have severe impacts on the level of wealth of the providers of financial information.

Accounting standard-setting aims to ensure that the financial reporting process of the companies becomes more reliable, transparent, consistent, and comparable. Thereby preventing the providers of financial information from manipulating the books of account and their wealth.

Step 3: The explanation for the incorrect options

Option (a) is an incorrect answer. Standard-setters must give first priority to ensuring that companies adhere to a more reliable, harmonious, transparent, and uniform financial reporting process in the interest of the various stakeholders (such as the retail investors, banks, etc.)

Option (b) is an incorrect answer. Issue of new standards may or may not lead to an increase in costs for the entities. The main focus of standard-setters is to bring better presentation in the financial reporting process by the issue of new accounting standards and amending the existing ones.

Option (c) is an incorrect answer. The objective of financial reporting should not be politically motivated just for the sake of ensuring acceptance by the general public. Instead, the entire process should aim to improve the financial reporting by companies.

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