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Accounting is an information system that serves to identify, record, and communicate economic events of an organization to interested internal and external users. The main objective of an accounting system is to provide financial information that reflects the true “substance” of an organization and the true results of its business activities…
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Download file to see previous pages... This common set of recognized accounting standards are collectively known as Generally Accepted Accounting Principles (GAAP).These standards provide information in how to properly communicate economic events or transactions (Investorwords, 2011). The conceptual framework of accounting provides the required information and guidelines regarding the objectives of financial reporting, the qualitative characteristics of financial information, operating guidelines and composition and required elements of financial statements. According to Financial Accounting Standards Board (FASB) the goals of financial reporting are to provide information that: Its useful for making investment and credit decisions Is helpful in assessing the value of future cash flows Identifies assets, liabilities and serves to identify changes in those resources and claims (Obaidat, 2007). In order to make financial information useful there are certain qualitative characteristics that all accounting information must posses to prove useful in the decision making posses. These characteristics are (Cliffnotes, 2011): 1. Relevance-the accounting information provided to the user must make a difference in their decision making. Relevant financial information has to provide either predictive value, provide feedback value or both. Predictive value helps the user forecast future events, such as predicting future stock valuation or future earnings. Information that provides feedback value focuses on confirming or corrects prior information or assumptions . In order for information to be relevant it must be provided in a timely manner so it can provide the right information and at the correct timeframe where it can help guide the decision making process. 2. Reliability-It is expected that financial information must be free of material errors or persona bias. In order to be reliable the information provided must be verifiable, in order to prove that it is free from material errors or bias. As an additional requirement the substance of the information provided must be a faithful representation of the economic events which it summarizes. The last prerequisite of reliable information must be neutral or free of bias. 3. Comparability-the usefulness of financial information is maximized when it can be compared with similar accounting information of other businesses or enterprises. This comparability can only be achieved when the different companies adopt the same accounting principles. In general comparability extends to all accounting not to only financial statements but to all accounting procedures such as costing, inventory and expense recognition. Since there are variations in GAAP and procedures that can be utilized the company must fully disclose the accounting methods used for the recording of financial events or transactions. 4. Consistency-The principle of consistency simply means that a company must use the same accounting principles and methodology from year to year. If a company decides to change any of its accounting practices and adopts a new method, it is the responsibility of management to prove that the new method provides a more accurate or meaningful representation of the financial information. There are a series of operating constrains and guidelines that serve as the foundation to any financial account. These guidelines are classified as assumptions, principles and constraints (Investorwords, 2011). ...Download file to see next pagesRead More
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