Characteristics of financial statements

Constraints also arise because users have different level of competence to handle large masses of data or to interpret summarised data in making predictions.

Qualitative characteristics of accounting information class 11

There are no rules regarding the time period of financial statements. Reliability The information communicated to the users will be worthless if it is not reliable and trustworthy. This means that the information provided must not have any significant errors or material misstatements. Say if the information is important but a reliable estimate cannot be made. Easiness: Financial statements should be easily prepared. In recent accounting literature, where relevance and reliability are held upon as the primary qualitative characteristics that accounting information must have if it is to be useful, materiality is not recognised as a primary characteristic of the same kind. But they can be prepared for any time frame as needed by the company. But no information about materiality or relevance should be left out of the statement because it is deemed too complex. This will enable them to do trend analysis and better understand the finances of the company. Definitely entity cannot do anything about users and its upon the user to have at basic level of understanding about financial statements. If there is no bias in selection of accounting information reported, it cannot be said to favour one set of interests over another. Comparability Comparability of information refers to its ability to stand useful overtime and against the financial information from other sources. The introduction of current cost accounting will illustrate the point.

FASB USA finds that it is not always easy to maintain a clear distinction between relevance and reliability, yet it is important to try to keep the two concepts apart.

Reliability and relevance often impinge upon each other.

Characteristics of corporate financial reporting

Conservatism One way to ensure that the accounts are comparable over time is stringently following the accounting standards. Comparability Firstly the users should be able to compare the financial statements of an enterprise over a period of time a few years. Timeliness: Timeliness means having information available to decision-makers before it loses its capacity to influence decisions. This characteristic is maintained by adopting accounting policies and standards that are applied are consistent from period to period and between different jurisdictions. An implication is that accounting researchers and policy-makers should not be content with merely trying to improve the relevance of accounting disclosures. The Indian Companies Act, has made it obligatory to give previous years figures in the balance sheet. The information can be predictive or confirmatory and usually both. Posted in: Accounting principles and concepts explanations There are mainly five types of financial statements; statement of financial position, income statement, statement of changes in equity, statement of cash flows and disclosure notes.

The quality of consistency can be applied in different situations, e. Adequate disclosure in annual reports, however, requires that users should be informed about the data limitations and the magnitude of possible measurement errors.

However, if two amounts are not equally likely, conservatism does not necessarily dictate using the more pessimistic amount rather than the more likely one. Historically, managers, investors, and accountants have generally preferred that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets.

accounting standard characteristics

Thus, if two estimates of amounts to be received or paid in the future are about equally likely, conservatism dictates using the less optimistic estimates. Timeliness alone cannot make information relevant, but a lack of timeliness can rob information of relevance it might otherwise have had.

Having timeliness and relevance may mean sacrificing some precision or reliability. That is, accounting information should not be limited to the interests of the average investor or sophisticated users but, in fact, information should be ordered and arrayed to serve a broad range of users.

Substance over Form. Whether there is a net gain to users of the information obviously depends on the relative weights attached to relevance and reliability assuming, of course, that the claims made for current cost accounting are accepted.

The possibility of error in measuring information and business events may create difficulty in attaining high degree of reliability.

Qualitative characteristics of financial statements ppt

For example, in order to make financial statements more reliable entity may include such financial information which is complex thus higher level of reliability is achieved at the expense of understandability. Although consistency in the use of accounting principles from one accounting period to another is a desirable quality, but it, if pushed too far, will prove a bottleneck for bringing about improvements in accounting policies, practices, and procedures. Information is also said to be relevant when it is capable of confirming or correcting the existing thought process and information. Also, full disclosure should be made of the alternative method applied and, whenever practical, of the monetary difference resulting from deviations from the standard. This means that information must be clearly presented, with additional information supplied in the supporting footnotes as needed to assist in clarification. It may, in fact, favour certain interests, but only because the information points that way. Ideal Financial Statement Characteristic 4. This characteristic will enhance the utility of these statements. Say if the information is important but a reliable estimate cannot be made. Analytical Representation 8. Ideally, financial reporting should produce information that is both more reliable and more relevant. Such information should help them evaluate past, present or even future events.
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Chapter 3: The Qualitative Characteristics of Financial Information