How internal and external users benefit from financial information

The role of accounting is vital in business since it assists the business to expand and grow. Accounting is the method of identifying, evaluating recording, and communicating financial data. This helps the supervisor in making financial decisions to enhance their business. Internal users utilize financial data to manage, plan and take decisions upon the circumstances and resources of business , such as salary costs or the cost of selling goods. Additionally, external users like suppliers, stockholders, and government agencies also require the financial reports from the business , for example, general Purpose Financial Report (GPFR) or Special Purpose Financial Report (SPFR). Accounting the conceptual framework of information there are a few qualitative aspects that make accounting information valuable, such as understanding relevant, reliability, and comparability. This article will critically analyze the characteristics of accounting information with regard to its understanding as well as reliability, relevance and comparability.

The primary characteristic of accounting data that makes it useful is the ability to comprehend. Understanding is the term used to mean it is the case that “users of accounting information can be assumed that they have reasonable knowledge about economic activities and to be able to read a financial report” (Ahmed Riahi-Belkaoui(2004) p186). According to this assumption, readers of financial reports should possess a reasonable level of financial understanding to enable them read the report. However while the users are accountable for understanding financial reports, the company must present a clear financial report. One example is that there are a lot of arguments against the new accounting system in the event that a business wants to change their old system due to the fact that there will be numerous users of financial reports who cannot comprehend the new method of accounting. Therefore the financial report will not be useful regardless of whether the new accounting method is more effective to make decisions. The argument goes on to say that “understandability is more important than relevant”. However, the modern business is extremely complicated, meaning that users need an advisor to interpret the financial statements for them in the event that they find it difficult to comprehend the financial reports. For instance, capital providers aren’t familiar with what the company will do in order to reduce its exposure to financial risk, and may have difficulty understanding the financial statement that explains the activities of exposure. However, this information is important to the people are making the decision (Financial the accounting standards board 2008). In addition, those who use accounting data must have a reasonable understanding of financial operations and be able to read the report on accounting. Additionally the financial report can be useful if it is easily understood for the readers.

Relevant is an significant characteristic of accounting data since it is among the most important qualitative quality of Hierarchy of Desirable Characteristics of Accounting Information (no author 2007). Relevance is defined as the degree to which it is determined that the data “is usefully associated with the action it is designed to facilitate or the result it is designed to produce” (Walter B. Meigs, 1979 37,). Thus, relevant information could influence managers’ decisions by altering or confirming their views regarding the outcome of their activities or events. There are three components that are relevant, which include predictive value as well as feedback value and time-to-market. According to Accounting’s concept framework relevant information is important for the creditors and investors to analyze the present, past and future of the activities (predictive value) and to validate the decisions (feedback worth). The information that is relevant is also timely as the information it contains can be less useful when the decision makers’ decisions could not make decisions within the stipulated time. In the end, the pertinent information is extremely useful to the users as they can take decisions based upon the current, past and future activities.

Thirdly, accounting data is not useful without trustworthiness. Reliability of accounting information is defined as being “truthful, accurate, complete and capable of being verified” (Wikianswers 2008). The reason accounting data must be reliable is because users will depend on the data in making decisions. There are three components in the reliability of information: verification, representational faithfulness, and neutrality. The accounting needs to be checked to ensure the accuracy of the information, to verify or alter the information. Furthermore, the degree of representational faithfulness refers to the relationship between the measure and the actual instances, in order that the data will be accurate and truthful. Additionally, the final feature of reliability can be described as neutral. The information that’s neutral is “free from bias toward attaining some desired result or inducing a particular mode of behavior” (Ahmed Riahi Belkaoui, 2004, 173) meaning that the purpose of the information cannot be influenced by the predetermined outcomes. If the information is not of credibility, businesses cannot make decisions based on it or make a wrong choice that will result in negative outcomes.

The most important quality of accounting data is comparability. This is the second quality. Comparability simply permits those who use the information to draw comparisons with the information that is variable. For instance there are three businesses who use different methods to calculate depreciation. The two first companies employ a straight line methods, while the third uses the “accelerated” depreciation method. In the end, people who use the information can’t decide based on the outcome because three businesses employing different methods. It is easier to make a decision for three companies to use the same method of calculating the depreciation (Ahmed Riahi Belkaoui, 2004, page 187). Comparability is different from consistency because it implies that the financial statement is able to be compared across a single company from one accounting period to the following. For instance, the business may decide to change its accounting system so that it’s difficult to compare the data in two accounting periods due to employing different accounting methods. Thus, the accounting data must be comparable in order for the user to make choices about the future by looking at the information from the past and the current information.

In the end, accounting reports will be helpful to users if they are able to demonstrate four attributes which are understandability, relevance credibility and comparability. Compatibility is the term used to describe that accounting data must be presented in a common manners, so that people who are knowledgeable about accounting reports will be able to comprehend the report. Additionally, the information on accounting must be accurate to the present, so that users are able to make their decisions in the future from the past and the present. Furthermore, trustworthiness appears to be one of the key aspects of accounting data because when the information is not accurate or untruthful , it can result in a wrong decision. Additionally, the information on accounting must be comparable to ensure that the user can review the data every year in order in order to make informed decision. Thus, accounting data is vital for people who use it because it affects the business and accounting is crucial in today’s.
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