Financial Information and it’s Characteristics
What are the main characteristics of financial information?
One thing stakeholders take a look at is the financial statement you present. You must contain vital information and quality content. Some of what you may need to include are:
The information presented to the shareholders should be complete. This means that all relevant transactions and events relating to the accounting period must show in the financial statements in accordance with relevant accounting principles. Roughly put, all transactions included in the statement occurred during the accounting period that the statement covers and that all transactions that occurred during the stated accounting period are included in the statement.
The outcome of many events and circumstances presented in the financial statements may be uncertain. For example; a company can only be sure of receiving the cash from a credit sale when the customer physically transfers the cash to the seller. Prudence means exercising a degree of caution when preparing financial statements so that assets/revenues are not overstated and liabilities/expenses are not understated.
Leaning more into information and what is considered to be reliable if it is: faithfully represented.
- This means that financial information must be similar to economic substance (which is part of the U.S. tax law that is used by the IRS to determine if tax shelters are used to abuse tax liability by reducing it, it is not merely the legal form of a transaction. To quote: “Under the doctrine, for a transaction to be respected, the transaction must change the taxpayer’s economic position in a “meaningful way” apart from the Federal income tax effects, and the taxpayer must have had a “substantial purpose” for entering into the transaction, apart from the Federal income tax effects.”
- An example of this would be where a business sells assets at the year end but they agree to buy them back again the day after the year ends by contract. Although, legally, a sale has taken place – the key is that the company has not really sold the goods at all; roughly said, they are window dressing to bump up their year end revenues.
Users must be able to compare financial information relating to the entity over time and against other business entities. To this end accounting treatments should be applied consistently from year to year and should be disclosed in the financial statements.
Materiality is a vital source of importance to you and others who will be filling out financial statements. Through this information – it can potentially influence the economic decisions of the users when taken on the basis of the financial statements as a whole. This also provides relevance.
- Relevance: information is looked at to be relevant if it has the ability to impact the economic commitments and decisions of the users and it is provided in time to influence those decisions.