Qualitative characteristics of financial statements

General
1

qualitative characteristics of financial statements

2

Qualitative Characteristics of Financial Statements

Answer:
Qualitative characteristics of financial statements are the attributes that make financial information useful for decision-making purposes. There are two main qualitative characteristics of financial statements:

  1. Relevance: Information is considered relevant if it influences the economic decisions of users. To be relevant, information must be timely and have predictive value, confirmatory value, or both. For example, information about a company’s earnings growth can help investors predict future profitability.

  2. Reliability: For information to be reliable, it must be free from material error and bias and faithfully represent the economic substance of transactions. Reliable information allows users to depend on it when making decisions. For instance, financial statements audited by independent third parties are considered more reliable.

In addition to relevance and reliability, there are other important qualitative characteristics:

  • Comparability: Financial information should be presented in a way that makes it easy for users to compare it with similar information from other periods or other companies. This allows for meaningful analysis and decision-making.

  • Understandability: Information should be presented in a clear and concise manner so that users with reasonable knowledge can comprehend it. Complex accounting jargon should be avoided to enhance the understandability of financial statements.

These qualitative characteristics are crucial in ensuring that financial statements provide valuable insights to users and assist them in making informed economic decisions.