Page 214 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

Exhibit 31: A hierarchy of accounting qualities

In addition to being relevant, information must be reliable to be useful. Information has reliability when it
faithfully depicts for users what it purports to represent. Thus, accounting information is reliable if users can
depend on it to reflect the underlying economic activities of the organization. The reliability of information depends
on its representational faithfulness, verifiability, and neutrality. The information must also be complete and free of

bias.
Representational faithfulness To gain insight into this quality, consider a map. When it shows roads and
bridges where roads and bridges actually exist, a map possesses representational faithfulness. A
correspondence exists between what is on the map and what is present physically. Similarly, representational
faithfulness exists when accounting statements on economic activity correspond to the actual underlying activity.
Where there is no correspondence, the cause may be (1) bias or (2) lack of completeness.
• Effects of bias. Accounting measurements contain bias if they are consistently too high or too low.

Accountants create bias in accounting measurements by choosing the wrong measurement method or
introducing bias either deliberately or through lack of skill.
• Completeness. To be free from bias, information must be sufficiently complete to ensure that it validly
represents underlying events and conditions. Completeness means disclosing all significant information in a
way that aids understanding and does not mislead. Firms can reduce the relevance of information by omitting
information that would make a difference to users. Currently, full disclosure requires presentation of a balance
sheet, an income statement, a statement of cash flows, and necessary notes to the financial statements and
supporting schedules. Also required in annual reports of corporations are statements of changes in
stockholders' equity which contain information included in a statement of retained earnings. Such statements

must be complete, with items properly classified and segregated (such as reporting sales revenue separately
from other revenues). Required disclosures may be made in (1) the body of the financial statements, (2) the

Accounting Principles: A Business Perspective 215 A Global Text