While you might think non-accountants don’t need to study financial accounting, an understanding of key accounting concepts, like the accounting equation and financial statements, can be helpful for all professionals. Financial accounting involves the preparation of accurate financial statements. The focus of financial accounting is to measure the performance of a business as accurately as possible.
The standardized reporting allows all stakeholders and shareholders to assess the performance of a business. The qualitative characteristics of accounting information are important because they make it easier for both company management and investors to utilize a company’s financial statements to make well-informed decisions. For example, the controller of a business chooses to add information to the financial statement disclosures regarding the cash flows being generated by its newest retail stores. This information is relevant to the decisions of the investment community, because it clarifies for them how well the entity is performing.
Relevance and reliability are accounting attributes that increase the integrity of accounting reports and statements. These attributes should therefore be present in any accounting information. If a business makes a credit sale, this sale is recorded as revenue to the business.
Confirmatory value means that the information provides feedback on previous evaluations (ie it allows users to confirm or change their opinion on such evaluations). For example, the same current year revenue information indicated above could be compared with revenue predictions which had been made in prior years to correct or improve processes that were used to make those yield variance definition previous predictions. Predictive value means that the information can be used to predict future outcomes. The financial information itself does not need to be a prediction or a forecast but can be interpreted by users to allow them to make their own predictions. For example, current year revenue information could be used as the basis to predict revenue in future years.
For example, if a company issues its financial statements a year after its accounting period, users of financial statements would find it difficult to determine how well the company is doing in the present. Relevance is the concept that the information generated by an accounting system should impact the decision-making of someone perusing the information. The concept can involve the content of the information and/or its timeliness, both of which can impact decision making.
There are no live interactions during the course that requires the learner to speak English. We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English. Financial accounting has been called the universal language of business, so it makes sense that all business professionals should be fluent.
When it comes to the conceptual frameworks in accounting, it is impossible to ignore relevance and reliability and still give out accurate information. That is why the relevance principle is so important to financial accounting. A big decision for a manager is whether to close a business unit or continue to operate it, and relevant costs are the basis for the decision. Assume, for example, a chain of retail sporting goods stores is considering closing a group of stores catering to the outdoor sports market. The relevant costs are the costs that can be eliminated due to the closure, as well as the revenue lost when the stores are closed. If the costs to be eliminated are greater than the revenue lost, the outdoor stores should be closed.
Increasingly, companies are including additional information about environmental impacts and risks, employees, community involvement, philanthropic activities, and consumer safety. Much of the reporting of such information is voluntary, especially in the United States. Accounting information can be developed for any kind of organization, not just for privately owned, profit-seeking businesses.
Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA), use standardized accounting financial statements to assess a company’s declared gross revenue and net income. The system of accounting helps to ensure that a company’s financial statements are legally and accurately reported. The primary output of the financial accounting system is the annual financial statement. The three most common components of a financial statement are the balance sheet, the income statement, and the statement of cash flows. In some jurisdictions, summary financial statements are available (or may be required) on a quarterly basis. These reports are usually sent to all investors and others outside the management group.
In particular, information that is provided to users more quickly is considered to have an increased level of relevance. This impact may be simply to confirm a decision that the reader has already made (such as to retain an investment in a company) or to reach a new decision (such as to sell an investment in a business). Accounting is popularly regarded as “the language of business” because it doesn’t just help you keep track of your money, but also helps you make informed decisions about your business. To speed up action, you may hire accounting professionals or purchase accounting software to ensure accurate financial audits and reporting. Investors, lenders, and other creditors are the primary external users of accounting information. Investors may be deciding to buy shares in the company, while lenders need to analyze their risk in deciding to lend.
Relevant accounting information must provide helpful information on what has happened in the past, what is currently happening, and what will most likely happen in the nearest future. A special order occurs when a customer places an order near the end of the month, and prior sales have already covered the fixed cost of production for the month. If a client wants a price quote for a special order, management only considers the variable costs to produce the goods, specifically material and labor costs.
It is important for companies to establish credibility with these external users through relevant and reliable accounting information. Information is relevant if it helps users of the financial statements in predicting future trends of the business (Predictive Value) or confirming or correcting any past predictions they have made (Confirmatory Value). Same piece of information which assists users in confirming their past predictions may also be helpful in forming future forecasts.