Question

Materiality of an item depends on relative size rather than absolute size.
a)True
b)False

Answer 1

True. The materiality of an item depends on relative size rather than absolute size in financial reporting.

Step-by-step explanation:

True. The materiality of an item indeed depends on relative size rather than absolute size. Materiality refers to the significance or importance of an item in financial reporting.

For example, if a company has a total asset value of $1,000,000 and discovers an error of $1,000, the absolute size of the error may seem small. However, if the error represents a misstatement of revenue or expenses, it may significantly impact the financial statements and therefore be considered material.

In contrast, an item with a large absolute size, such as a $1,000,000 expense, may not be considered material if it does not impact the overall financial statements in a significant way. Therefore, the relative size and context of an item are important factors in determining its materiality.