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Accounting Information

Characteristics of Useful Accounting Informtion/ Financial

Statements
1. Understandability
2. Relevance
3. Reliability
4. Faithfulness Reprentation
5. Neutrality
6. Completeness
7. Comparability
1.Understandability

The financial statements must be understandable to the

user, however you may assume in this regard that the user
has:

• a reasonable knowledge of accounting; and

• a willingness to carefully study the financial information
provided
2.Relevance
• The financial statements must contain relevent
information. When deciding what is relevant, one must
consider the users needs in decision making.

• a user will use financial statements to predict , for

example, the future assets structure, profitibility and
liquidity of the business and to confirm his previous
predictions.
Materiality of the items
• while considering relevant information, the accountnt may
consider the materiality concept.

• Materiality is a term that Framework explains that one

should consider something (an amount or some other
information) to be matrial if the economic decisions of the
users could be influenced if it were mis-stated or omitted.
3.Reliability

in order to financial statements to be reliable, they should

not include material error or bias and should:
• be a faithful representation;
• show the substance rather than the legal form of the
transaction;
• be neutral;
• be prudent (but not to the extent that reserves become
hidden); and
• be complete (within the confines of materiality and cost).
4.Faithfulness Reprentation
• Most financial statements have some level of risk that not all
transactions and events have been properly identified and that the
measurement basis used for some of the more complex
transactions might not be the most appropriate.
• sometimes events or transactions can be so difficult to measure
that the entity choose not to include them in the financial
statements.
• the most common example of this is internal good will that the
entity is probably creating but which it cannot recognize due to
the inability to clearly identify.
• Therefore, faithful representation characteristic requires that such
ambiguities should not be included in financial statements.
5.Neutrality
• for financial statements to be neutral, they must be free
from bias,

• Bias is the selection or presentation of information in such

a way that you achieve a pre-determind result or
outcome in order to influence the decisions of users
6.Completeness
• Financial statements need to be as complete as possible
given the confines of materiality and cost.
• This is because omission of information could be
misleading and result in information that is therefore
unreliable and not relevant.
7.Comparability
• Financial statements should be comparable from one
year to next.
• Therefore, accounting policies must be consistently
applied.
• It means that transactions of a similar nature should be
treated in the same way that they were treated in the prior
years.
• Furthermore, they must all comply with the same
standards, so that when comparing two entities’ financial
statements, a measure of comparability is guaranteed.
Users of Financial Statements

1. Internal users

2. External users
Internal Users

Inernal users of accounting information are those persons

or groups who are within the organization.

1. Owners
2. Management
3. Employees
Owners
• The owners who provide funds or capital for the
organization.
• They possess curiosity in knowing whether the capital is
being used employeed properly or not.
• Therefore, they are the primary users of financial
statements.
Management
• The management of the business is greatly interested in knowing
the position of the business.
• The accounts are the basis on which the management can study
the merits & demerits of the business activity.
• Thus, the management is internal interested in financial
statements to find whether the business carried on is profitable or
not.
• Therefore financial statements are the “eyes and ears of
management and facilitates it in drawing future course of action,
further expansion etc”
Employees
• For assessing company's profitability and its
consequence on their future remuneration and job
security
External Users
• External users are those groups or persons who are
outside the organization for whom accounting function is
performed.
Creditors
• for determining the credit worthiness of the organization.
Terms of credit are set by creditors
• according to the assessment of their customers' financial
health.
• Creditors include suppliers as well as lenders of finance such
as banks.
Tax Authorities/ Government
• Government keeps a close watch on the financial
performance of the business entities for various purposes.

• Above all, the provincial and federal govenment are

intrested in the financial statements to know the earnings
for the purpose of taxation.
Which of the following would be considered as external users of
accounting information's?

A. Shareholders
B. Board of Directors
C. Finance manager
D. Sales manager
Investors
• for analyzing the feasibility of investing in the company.
Investors want to make sure they can earn a reasonable return
on their investment before they commit any financial resources
to the company
Customers:
• for assessing the financial position of its suppliers which is
necessary for them to maintain a stable source of supply in the
long term.
Regulatory Authorities
• Various government such as Securities and Exchange
Commission of Pakistan.

• for ensuring that the company's disclosure of accounting

information is in accordance with the rules and regulations set
in order to protect the interests of the stakeholders who rely
on such information in forming their decisions.