1.01 Generally Accepted Accounting Principles – Qualities of Accounting Information

1. 1.01 Generally Accepted Accounting Principles – Qualities of Accounting Information GAAP PowerPoint #2

2. Hierarchy of Qualitative Information Cost/Benefit (discussed in PPT #3) Materiality (discussed in PPT #3) www.fasb.org

3. 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

4. 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

5. 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

6. 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

7. Reliability • Must be verifiable • 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.

8. 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

9. 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.

10. 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

11. 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?