Question

The financial statements for DRG Industries contain a misstatement that is so significant that reasonable investors would likely make a different investment decision if they were given the correct information. What concept of GAAP applies to this situation?a. Full disclosure
b. Revenue recognition
c. Materiality
d. Cost-benefit

Answer 1

Answer:

c. Materiality

Explanation:

The relevance of information is affected by its materiality.  Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.

An error which is too trivial to affect a user’s understanding of financial statement is referred to as immaterial.  There is no absolute measure of materiality that can be applied to all businesses. In other words there is no rule that says any item greater than 5% of profit must be material. Whether an item is material or not depends on its magnitude or its nature or both in the context of the specific circumstances of the business.

So based on the above discussion, the answer is c. Materiality