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Key Concepts in Financial Reporting

The document discusses key concepts of accounting information including relevance, predictive value, confirmatory value, neutrality, comparability, understandability, verifiability, and timeliness. Relevance refers to how accounting information impacts decision making, while predictive value refers to using past financial statements to predict future performance. Other concepts include information being neutral, comparable across periods and businesses, understandable, able to be verified by a third party, and timely for decision making.

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Heron Lacanlale
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37 views22 pages

Key Concepts in Financial Reporting

The document discusses key concepts of accounting information including relevance, predictive value, confirmatory value, neutrality, comparability, understandability, verifiability, and timeliness. Relevance refers to how accounting information impacts decision making, while predictive value refers to using past financial statements to predict future performance. Other concepts include information being neutral, comparable across periods and businesses, understandable, able to be verified by a third party, and timely for decision making.

Uploaded by

Heron Lacanlale
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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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. In particular, information that is provided to
users more quickly is considered to have an increased level of relevance.

Predictive value refers to the fact that quality financial information can be used to base
predictions, forecasts, and projections on. Financial analysts and investors can use past
financial statements to chart performance trends and make predictions about future
performance and profitability.

Confirmatory value – Provides information about past events

Neutrality, which means that financial statements must be free from errors or from
other missions. Financial statements cannot be prepared with the purpose to influence
certain decisions, i.e. they might be neutral. Users of the accounting data should have
the ability or possibility to make their own decisions based on that information.

Comparability. It has to be ensured that users of the financial statements are able to
compare financial data about the business with other businesses and also
across several accounting periods covering the same business. Therefore, the notes to
the financial statements become very important and must explain any reasons or
circumstances, if there are any, why such comparison is not possible.

Understandability. It is important accounting concept, which means that financial data


presented in the financial statements must be clear. It assumed that users have some
business and accounting knowledge, but even without as much as possible it can be
understood by the user.

Verifiability concept states that it should be possible for an organization's reported


financial results to be reproduced by a third party, given the same facts and
assumptions. For example, an outside auditor should be able to construct the same
financial statement results as a client, using the same set of financial records and
using the same assumptions applied by the client.
Timeliness is how quickly information is available to users of accounting information.
The less timely (thus resulting in older information), the less useful information is for
decision-making. Timeliness matters for accounting information because it competes
with other information. 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.

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