An Analysis Of Qualitative Characteristics Of Accounting Information (Essay Sample)

Name Instructor Course Date Accounting 1 Qualitative Characteristics of Accounting Information Accounting information refers to the data derived from analysis of business transactions. The information portrays the transactions involving the purchase of machinery, equipment, and inventory. In addition, the information also highlights the revenues collected from sales and other business operations. Accounting is an approach of identifying and collecting data about business transactions and applying it in the generation of various reports that are useful to various stakeholders. The stakeholders are both internal and external, which necessitates a firm to have two perspectives of accounting. One of the perspectives is the managerial accounting focusing on the needs of the internal users. On the other hand, financial accounting focuses on historical data and consequently standardized for external stakeholders’ application. Qualitative Characteristics of Accounting Information Accounting information has four qualitative characteristics. One of the characteristics is that it is relevant because it influences the decision-making process of an organization. In this regard, the management and other internal stakeholders use the information to make decisions concerning the strategies to be applied and ensure that the firm is headed in the right direction. Without accounting information, it would be impossible to determine the financial performance of the organization and therefore the management does not have a basis for making decisions that will improve or sustain the company’s productivity (Nobes and Stadler 579). In relation to external stakeholders, investors use the accounting information of a firm to make decisions if it is a viable investment opportunity. Accounting information is also reliable because it is factual, verifiable, and neutral. Many stakeholders rely on accounting information to gauge the performance of an organization in the market. For instance, the management can verify that a firm made a profit or a loss through the information provided by accounting methods. In addition, investors use accounting information to determine the yields of their investments (Nobes and Stadler 580). The reliability of accounting information plays an essential role in highlighting factual data about the financial position of a business. Accounting information is comparable, which means that it can be used to compare the performance of different businesses. The comparability characteristic is primarily beneficial to the external stakeholders particularly the investors. Accordingly, investors are interested in firms that are performing positively in financial terms and therefore they use the information provided by accounting methods to identify the most viable firm to invest in. Subsequently, the provision of historical data is used to identify an organization that has the ideal strategies that counters the current challenges in the market. Accounting information is characterized by consistency in different financial periods. The consistency of the financial performance of corporations benefits a variety of both internal and external stakeholders. For instance, the management identifies the discrepancies in financial performance of a firm and subsequently provides the employees with the necessary resources and motivation to augment the business’s revenue generation (Peterson, Schmardebeck, and Wilks 2484). In addition, external stakeholders such as investors and the community are provided with the necessary information of how the organization has been performing in the past and currently and therefore can make decision about supporting some of the policies introduced by the corporation. The qualitative characteristics of accounting information makes it comprehensible and applicable for reporting and decision-making purposes. Consequently, the management and other stakeholders are offered useful information regarding the performance of the organization. Furthermore, regulatory bodies, government, and creditors use accounting information to measure the financial performance of a firm and subsequently identify the viability of the organization in relation to investments, credit worthiness, and other parameters. 2 Accounting Principles Accounting principles refers to the guidelines, regulations, and rules that govern financial reporting by companies. Different countries have varying principles. For instance, the United States applies the generally accepted accounting principles (GAAP) to regulate the accounting processes. Consequently, for a company to be listed in major stock exchanges in the country it must file financial statements regularly and the reporting must adhere to the rules of GAAP. The principles form the basis for general concepts and rules. Some of the most popular accounting codes include matching, accrual, going concern, and revenue recognition principles. Accounting Assumptions Accounting assumptions are concerned about a company’s operations and structural organization. Tersely, the assumptions are concerned with the structure of business transactions and their documentation. In the event that the assumptions are not true, the firm may need to change the financial information reported in the financial statements. The accrual assumption assumes that all transactions are documented through the accrual basis of accounting. The assumption recognizes expenses and revenues as real when used or earned (Iacoviello 144). In the event that this assumption is not true, a firm should apply the cash basis of accounting in the development of financial statements because they are based on cash flows. Conservatism assumption assumes that expenses and revenues are recognized only when earned although it has an aspect of bias inclined towards earlier recognition of expenses. If the assumption is not true, then the company could be misleading investors by posting optimistic financial results. The consistency assumption means that the same accounting approach is used in different financial periods unless the method is replaced by a more efficient procedure. On the other hand, the economic entity assumption implies that the transactions of the business owners and a firm are not intermingled, making...