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Paper 1 Principles and Practices of Accounting Theoretical Framework 1.21

What is important to note is that omission of any information should not impair the
decision-making of various users.

1.13 Financial Statements

The Fnancial Statements (FS) are the basic means through which the management of
a business entity makes public communication of the financial information along with
selected quantitative details. To have a record of all the business transactions and also
to determine if all these transactions resulted in either “profit or loss” for the period,
all the entities will prepare financial statements, viz. balance sheet, cash flow statement,
profit and loss account, etc. by following various accounting priciples, concepts and con-
ventions which have been already discussed in detail.

1.13.1 Qualitative Characteristics of Financial Statements

Following are the list of qualitative characteristics of financial statement.

Understandability: Information provided in financial statements must be understand-
able. It is assumed that users have reasonable knowledge of business, economic activi-
ties and accounting. However, complex matters should not be excluded merely because
it may be too diffcult for certain users to understand.

ƒ Relevance: It must be relevant to the users’ decision making. Information about past
performance and financial position and past performance is used as the basis for pre-
dicting future financial position, performance and other matters where users are
directly interested. To have a predictive value, information need not be in the form of
an explicit forecast. The quality of relevance of a particular information can be ascer-
tained when it influences the economic decisions of users by helping them in evaluating
the future, present and past events or confirming, or correcting their past evaluations.

ƒ Reliability: Information has the quality of reliability when it is free from material
error and bias and can be depended upon by users to represent faithfully that which
it either purports to represent or could reasonably be expected to represent.

ƒ Comparability: Users should be able to compare the financial statements of an
organisation through time in order to identify trends in its financial position, cash
flows and perfromance. The users of financial statements must also be able to com-
pare the financial statements of different organisations in order to evaluate their
relative financial position. An important implication of the qualitative characteris-
tic of comparability is that the users of financial stataments be informed of the
accounting policies employed in the preparation of the financial statements, any
changes in those polices and the effects of such changes. The need for compara-
bility should never be confused with mere uniformity and should not be permitted
to result in it becoming an impediment to the introduction of improved accounting
standards. It is also inappropriate for an organisation to continue accounting in

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