Financial Accounting: Understanding Key Financial Characteristics

This report provides a comprehensive overview of the essential characteristics of financial information within the context of financial accounting. It meticulously explores three key features: understandability, relevance, and reliability. The report explains understandability by emphasizing the need for financial statements to be easily comprehensible to users, ensuring consistency and comparability through standard accounting principles. It then delves into relevance, highlighting its importance in influencing economic decisions by providing predictive and confirmatory value, and the significance of accurate and timely information. Finally, the report examines reliability, focusing on the need for information to be free from material error, neutral, and a faithful representation of transactions. The report explains the benefits of these characteristics for stakeholders, including their impact on decision-making and the assessment of a company's financial position. References are provided to support the analysis.

Running Head: FINANCIAL ACCOUNTING
Characteristics of financial information

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Features, importance and benefits of financial information
Understandability
This feature states that the information mentioned in financial statements should be easy to
understand by the users. In other words, users should be able to observe the significance of
the information. People who are preparing financial reports are allowed to assume that user
has sufficient knowledge of business, accounts, and economic activities and is willing to
study the report with due diligence (Nikolai, Bazley and Jones, 2009). In order to maintain
understandability, the financial information is classified and combined as per the standard
disclosure formats. However, large companies have thousands of different ledger accounts
and it will be useless to provide a list of all the balances to the users at the year end. To
generate a better understanding, a total amount of each item must be provided. For example
total figure of all credit receivable gives a better information that can be useful for the users.
They can even compare the figure with the past year amount of total credit receivables (Weil,
Schipper and Francis, 2013).
Understandability brings consistency in financial reporting. In order to increase it, companies
need to follow standard accounting principles which ultimately results in consistent
accounting information. Having consistency means company uses same method for treatment
of transactions and events every year. This provides benefit to the users of the financial data
such as stakeholders can predict future trend or how will the company perform financially
based on the past performance (Loughran, 2011).
The second aspect understandability brings with itself is comparability. If the information is
understandable then it can be easily compared with other financial data. The importance of
comparability comes from the review of the financial facts of two different companies when
placed next to each other. Benefit of this aspect to the users is that they can understand the
data of both companies and can compare them in order to decide which one is performing
better. Stakeholders by comparing, can take decisions regarding the steps to be taken to
improve the performance of the company in order to make it competent (Kieso, Weygandt
and Warfield, 2010).
Thus, it can be said that without understandability, the financial information will be deprived
of consistency and comparability, the two aspects required to be present in the data or facts.
However, the concept of making the data understandable does not imply that business make it
understandable for every individual. Accountant should put efforts in making the information
in a way that can be easily understood by regular business persons. For example, disclosing
the accounting policies can help in increasing the same.
Relevance
An information is said to be relevant if it is capable of influencing the economic decisions of
users by assisting them in evaluating past, present and future circumstances. Therefore, the
information must have a predictive and a confirmatory value. The information has a
predictive value if it helps the users to assess the past, present and future events. The ability
to predict is enriched by the manner in which the information is presented in the past. The
information having confirmatory value means it is helping the users in correcting and
confirming their past evaluations. The data can have both the values, but the relevancy can

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only be maintained when it is provided timely and is more likely to affect economic decision
(Rajasekaran, 2011).
Relevance is very important to be present in the income statement of the companies. Having a
relevant information provides a surety to the users that all the inventory costs are included in
the cost of goods sold. Expense shown must also be relevant to a particular revenue made
during the period. If they are charged wrongly, then they can affect company’s income to a
great extent. Managers and business owners can make appropriate decisions regarding
inventory cost with the help of relevant information. Inventory cost is very important for the
business as it gives an idea about the money, an owner needs to pay to purchase direct
material for production purpose (Malina, 2017).
An information is said to be relevant if it is accurate and timely. These two factors make a
financial information relevant to its users. Accuracy make sure that all the events are properly
recorded in company’s books of account. On the other side, timeliness means recoding of an
accounting information in the proper and relevant accounting period. The information
recorded appropriately and timely will help the users in taking decisions regarding the
business. It helps in reducing the user’s uncertainty about future activities. Relevancy of data
enables the users to predict the events of their interest and take suitable decisions regarding
them. Moreover, they can also evaluate the past data in order to check the relevancy on the
basis of their accuracy and timeliness (Henderson, et.al. 2015).
Reliability
In order to be useful, an information must also be reliable. The information is said to be
reliable when:
 There is no material error;
 It is neutral;
 There is a faithful representation.
Users can only rely on the information when it faithfully represents each and every
transaction, free from biasness and be prudent and complete. According to the principles of
financial reporting, it is very important for the financial information to be free from any kind
of materiality error, in order to be reliable for the users. Data that contain some material error
may result in the wrong presentation of final accounts and thus said to be unreliable and poor
in terms of relevance (Griff, 2014).
Another fact that make the information reliable is its neutrality. Statements must have the
data which is free from biasness. If not so, then they may end up affecting the decision
making process of the management, conducted for achieving predetermined goals. Faithful
disclosure of transactions and events in financial statements is also one factor that forms the
basis for reliability of information. It includes identification of all the obligations associated
to a transaction and accounting for it in a manner that reflect economic substance. Items must
be accounted not only with regard to their legal form but also with their economic reality
(Kumar, 2017).
It is very essential for the accounting information to be reliable as it provides the basis for the
decision making process. It also give surety to the owners and stakeholders that the data is
correctly entered in the books and represents a true and fair picture of company’s financial

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position. Reliability helps the users of financial information such as business owners in
securing the external financing for their firm by relying on the given data and facts. Investors
also get benefited as they can take right decision regarding their investment in the company.
If the information provided is not reliable that is if there is any material error or biasness or it
is not faithfully represented then, it may result in the deterioration of management’s ability
and trust of lenders or investors in the company. So it is very important for the account to
give an accurate, neutral and reliable accounting information (Porter and Norton, 2012).
From the above discussion, it can be implied that it is very necessary to have these features or
characteristics in the financial information. These qualities will be very helpful for the users
of information and also important as they improve the data to the extent, on the basis of
which users can take essential decisions about the company and its business.

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References
Nikolai, L.A., Bazley, J.D. and Jones, J.P., 2009. Intermediate Accounting (Book Only).
Cengage Learning.
Griff, M., 2014. Professional Accounting Essays and Assignments. Lulu Press, Inc.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial
accounting. Pearson Higher Education AU.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2010. Intermediate accounting: IFRS
edition (Vol. 2). John Wiley & Sons.
Kumar, M., 2017. Value Relevance of Accounting Information in Capital Markets of India:
Value Relevance. In Value Relevance of Accounting Information in Capital Markets (pp.
169-192). IGI Global.
Malina, M.A., 2017. Advances in Management Accounting.
Loughran, M., 2011. Financial accounting for Dummies. John Wiley & Sons.
Porter, G.A. and Norton, C.L., 2012. Financial accounting: the impact on decision makers.
Cengage Learning.
Rajasekaran, V., 2011. Financial accounting. Pearson Education India.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.