1.01 Generally Accepted Accounting Principles – Qualities of Accounting Information GAAP PowerPoint #2

Hierarchy of Qualitative Information Understandability Decision Usefulness Relevance Predictive Value Feedback Value Timeliness Reliability Verifiability Neutrality Representational Faithfulness Comparability and Consistency Cost/Benefit (discussed in PPT #3) http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156317989 Click on agreement, select yes Page 18 will contain the diagram above Materiality (discussed in PPT #3) www.fasb.org

Objectives of Financial Information To provide useful, understandable information to users of financial statements for decision making For present and potential investors and creditors and other users in making rational investment, credit, and similar decisions To help present and potential investors and creditors and other users to assess the amounts, timing, and uncertainty of prospective cash receipts To inform users about the economic resources of an enterprise; the claims to those resources (obligations); the effects of transactions, events, and circumstances that cause changes in resources and claims to those resources

Objectives of Financial Information Decision usefulness the quality of being useful to decision making Understandability users must understand the information within the context of the decision being made

Primary Qualities of Accounting Information Relevance Definition: relating to the matter at hand Reliability Definition: the quality or state of being reliable; and the extent to which an experiment, test, or measuring procedure yields the same results on repeated trials http://www.merriam-webster.com

Relevance Capable of making a difference in the decision making of the user Must have predictive or feedback value Predicts or forecasts for users about the outcome of events of a company Provides feedback value for users to confirm or correct prior expectations of a company Must be presented in a timely manner Provides current information to users to help with decision making

Reliability Must be verifiable Must be a faithful representation Able to be proven; not subject to opinion Must be a faithful representation Agreement between the accounting numbers and supporting documentation Must be reasonably free from error No mistakes or inaccuracies should be found in the financial statements Must be reasonably free from bias; should be neutral Accounting information should not favor any groups or companies but be a true and factual representation of a company’s financial position.

Secondary Qualities of Accounting Information Comparability Definition: The quality of information that enables users to identify similarities in and differences between two sets of economic phenomena. Consistency Definition: Conformity from period to period with unchanging policies and procedures. Information about a particular enterprise gains greatly in usefulness if it can be compared with similar information. www.fasb.org

Comparability The purpose of comparison is to detect and explain similarities and differences. Accounting information should be comparable across different companies and over different time periods.

Consistency Consistent use of accounting principles from one accounting period to another enhances the utility of financial statements to users. A quality of the relationship between two accounting numbers

Questions for Understanding and Discussion Explain the concept of the FASB’s conceptual framework. (Slide 2) What is the primary objective of financial accounting? Explain relevance and reliability of financial statements. What are the components of relevant information? What are the components of reliable information? Why should financial statements be both comparable and consistent?