Acc 502 week 2 answer to professor – Description
The textbook provides three key qualitative characteristics of financial information (relevance, reliability, and consistency). Describe one of these three terms and explain its influence on the financial statements. Include a numerical example to prove your points. Participate in follow-up discussions by reading classmates’ posts and providing an example on the significance to the user if the qualitative characteristics are not followed in the preparation of financial statements.
My Reply,
Hello Sir and Class,
The quality and usefulness of financial information depend on the qualitative attributes. These attributes include relevance, reliability, and consistency. Gaining more insights into relevance is essential since it is a fundamental characteristic that enhances financial statements. Relevance in accounting entails the ability of financial information to influence the stakeholders’ decision-making while perusing the information. The content and timeliness of financial information constitute critical aspects of relevance and their influence on the stakeholders’ decisions (Dewi, Azam, & Yusoff, 2019). In this view, prompt generation and dissemination of financial information to users increase the relevance of financial statements. For instance, timely financial statements are highly relevant since they inform the users’ decision to retain or sell an investment.
A critical example of relevance is when a controller in a firm hastens the month-end close to ensure the generation and dissemination of financial statements in 5days. Since the firm financial reporting standards necessitate reporting after three weeks, the internal and external stakeholders receive the financial statements faster, improving information relevance. Another example involves an engineering manager and capacity improvement projects. In this case, the engineering manager contemplates installing modern and more advanced production equipment. However, before purchasing, the sales department releases a performance forecast indicating a 20% sales decline. This aspect enhances the relevance of the financial information by influencing the engineering manager’s decision not to make the purchase. In this view, relevance affects financial statements by increasing their utility under the users’ possession (Lin et al., 2019). It enables leaders and professionals to assess their alternatives in a given economic situation and use timely, accurate, and impactful information to make informed decisions.
References
Dewi, N., Azam, S., & Yusoff, S. (2019). Factors influencing the information quality of local government financial statements and financial accountability. Management Science Letters, 9(9), 1373-1384. http://www.m.growingscience.com/msl/Vol9/msl_2019_126.pdf
Lin, S., Riccardi, W. N., Wang, C., Hopkins, P. E., & Kabureck, G. (2019). Relative effects of IFRS adoption and IFRS convergence on financial statement comparability. Contemporary Accounting Research, 36(2), 588-628. https://doi.org/10.1111/1911-3846.12475.
Hi Beena,
Your explanation of the qualitative attributes of financial information, particularly relevance, is well-articulated. Relevance is crucial in determining the usefulness of financial statements for stakeholders. Timeliness and content play significant roles in enhancing the relevance of financial information, as they directly impact users’ decision-making process.
The example you provided regarding the controller expediting the month-end close to generate and disseminate financial statements within five days, surpassing the usual reporting timeline of three weeks, illustrates the importance of timeliness in improving information relevance. By providing financial statements faster, internal and external stakeholders have access to up-to-date information, enabling them to make timely and informed decisions about their investments or other actions.
Additionally, your example involving the engineering manager and the performance forecast from the sales department highlights how relevant financial information influences decision-making. The sales decline forecast influences the engineering manager’s choice not to purchase new production equipment, demonstrating the impact of relevant financial information on strategic decision-making within the organization.
The utility of financial statements lies in their ability to provide relevant information to users, enabling them to assess alternatives, analyze economic situations, and make informed decisions. By considering the qualitative attribute of relevance, financial statements can better serve the needs of stakeholders in various decision-making contexts.
What are some challenges or limitations in achieving relevance in financial reporting, and how can these challenges be addressed to enhance the usefulness of financial information for stakeholders?
Dr. B
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