Exercise 1-4. True or false - Theory 1. Verifiability helps assure users that information faithfully represents the economic phenomena it intends to represent. 2. Financial statements are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyze the information diligently. 3. In assessing whether an item meets the definition of an asset, liability, or equity, analysis should focus not only to its legal form but also to its underlying substance and economic reality. 4. Physical form is essential to the existence of an asset. 5. Obligations also arise from normal business practice, custom, and a desire to maintain good business relations or act in an equitable manner. 6. A decision by the management of an entity to acquire assets in the future gives rise to a liability. 7. The definition of income encompasses both revenue and gains. 8. The definition of income also includes rent collected in advance. 9. The definition of expenses encompasses losses as well as those expenses that arise in the course of the ordinary activities of the entity. 10. When losses are recognized on the profit or loss statement, they are usually displayed separately because knowledge of them is useful for the purpose of making economic decisions.