Class notes
Qualitative Characteristic of Financial Statement
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Qualitative Characteristic of Financial Statement
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Qualitative Characteristic of Financial Statement1. Relevance - Information must be relevant to users' decision-making needs in order to
be valuable. When information influences a decision by assisting users in making
predictions about the result of past, present, and future events, or confirming and
correcting existing expectations, it is said to be relevant.
2. Reliability - Information must be trustworthy in order to be useful. When information
is free of flaws and bias and can be relied upon by users to accurately represent what it
purports to represent, it is said to be reliable. To put it another way, financial statements
are trustworthy if they accurately reflect the economic effects of transactions, are
unbiased, judicious, and comprehensive in all material respects. An omission can lead
to misleading and inaccurate information, making it untrustworthy.
3. Understandability - The information in the financial statements must be presented in
a format and vocabulary that a user can comprehend. Understandability is critical
because even if financial data is relevant and dependable, it can be rendered useless if
it is not comprehended by the information's users or decision-makers.
4. Comparability - The ability to bring people together for the aim of identifying
similarities and contrasts. Users must be able to compare an entity's financial
statements across time to spot trends in its financial status and performance from one
accounting period to the next. Users can make more accurate forecasts and judgments
by knowing prior trends. Comparability also allows comparisons between two or more
businesses in the same industry.
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