Q. Why external users use accounting information (Nov-2011)?
(a) Investors: Those who want to invest money in an organization want to know the financial health of the organization. They need accounting information which will help them in evaluating past performance and future prospects of the organization.
(b) Creditors: Creditor means supplier of goods and services on credit banks and leaders of money who want to know the financial position of a concern before providing loans or granting credit. They need accounting information relating to current assets, quick assets and current liabilities which is available in the financial statements.
(c) Member of non-profit organizations: Non profit organizations such as hospitals, clubs, schools, colleges etc. need accounting information to know how their contributed funds are being utilized. This information helps them to make decision regarding future support.
(d) Government: Government wants to know earnings or sales for a particular period for the purpose of taxation,income tax returns are example of financial reports which are prepared with information taken from accounting.
(e) Research scholars: Accounting information helps research scholars who want to make a study into the financial operation of a particular firm.
(a) Investors: Those who want to invest money in an organization want to know the financial health of the organization. They need accounting information which will help them in evaluating past performance and future prospects of the organization.
(b) Creditors: Creditor means supplier of goods and services on credit banks and leaders of money who want to know the financial position of a concern before providing loans or granting credit. They need accounting information relating to current assets, quick assets and current liabilities which is available in the financial statements.
(c) Member of non-profit organizations: Non profit organizations such as hospitals, clubs, schools, colleges etc. need accounting information to know how their contributed funds are being utilized. This information helps them to make decision regarding future support.
(d) Government: Government wants to know earnings or sales for a particular period for the purpose of taxation,income tax returns are example of financial reports which are prepared with information taken from accounting.
(e) Research scholars: Accounting information helps research scholars who want to make a study into the financial operation of a particular firm.
Q. Distinguish between relevance & reliability (Nov-2011).Relevance:
(1) Relevant accounting information is capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations. Information can make a difference to decisions by improving decision makers' capacities to predict or by providing feedback on earlier expectations. Usually, information does both at once, because knowledge about the outcomes of actions already taken will generally improve decision makers' abilities to predict the results of similar future actions. Without knowledge of the past, the basis for a prediction will usually be lacking. Without an interest in the future, knowledge of the past is sterile.
(2) Timeliness, that is, having information available to decision makers before it loses its capacity to influence decisions, is an ancillary aspect of relevance. If information is not available when it is needed or becomes available so long after the reported events that it has no value for future action, it lacks relevance and is of little or no use. Timeliness alone cannot make information relevant, but a lack of timeliness can rob information of relevance it might otherwise have had.
Reliability:
(1) The reliability of a measure rests on the faithfulness with which it represents what it purports to represent, coupled with an assurance for the user that it has that representational quality. To be useful, information must be reliable as well as relevant. Degrees of reliability must be recognized. It is hardly ever a question of black or white, but rather of more reliability or less. Reliability rests upon the extent to which the accounting description or measurement is verifiable and representationally faithful. Neutrality of information also interacts with those two components of reliability to affect the usefulness of the information.
(2) Verifiability is a quality that may be demonstrated by securing a high degree of consensus among independent measure-rs using the same measurement methods. Representational faithfulness, on the other hand, refers to the correspondence or agreement between the accounting numbers and the resources or events those numbers purport to represent. A high degree of correspondence, however, does not guarantee that an accounting measurement will be relevant to the user's needs if the resources or events represented by the measurement are inappropriate to the purpose at hand.
(3) Neutrality means that, in formulating or implementing standards, the primary concern should be the relevance and reliability of the information that results, not the effect that the new rule may have on a particular interest. A neutral choice between accounting alternatives is free from bias towards a predetermined result. The objectives of financial reporting serve many different information users who have diverse interests, and no one predetermined result is likely to suit all interests.
(1) Relevant accounting information is capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations. Information can make a difference to decisions by improving decision makers' capacities to predict or by providing feedback on earlier expectations. Usually, information does both at once, because knowledge about the outcomes of actions already taken will generally improve decision makers' abilities to predict the results of similar future actions. Without knowledge of the past, the basis for a prediction will usually be lacking. Without an interest in the future, knowledge of the past is sterile.
(2) Timeliness, that is, having information available to decision makers before it loses its capacity to influence decisions, is an ancillary aspect of relevance. If information is not available when it is needed or becomes available so long after the reported events that it has no value for future action, it lacks relevance and is of little or no use. Timeliness alone cannot make information relevant, but a lack of timeliness can rob information of relevance it might otherwise have had.
Reliability:
(1) The reliability of a measure rests on the faithfulness with which it represents what it purports to represent, coupled with an assurance for the user that it has that representational quality. To be useful, information must be reliable as well as relevant. Degrees of reliability must be recognized. It is hardly ever a question of black or white, but rather of more reliability or less. Reliability rests upon the extent to which the accounting description or measurement is verifiable and representationally faithful. Neutrality of information also interacts with those two components of reliability to affect the usefulness of the information.
(2) Verifiability is a quality that may be demonstrated by securing a high degree of consensus among independent measure-rs using the same measurement methods. Representational faithfulness, on the other hand, refers to the correspondence or agreement between the accounting numbers and the resources or events those numbers purport to represent. A high degree of correspondence, however, does not guarantee that an accounting measurement will be relevant to the user's needs if the resources or events represented by the measurement are inappropriate to the purpose at hand.
(3) Neutrality means that, in formulating or implementing standards, the primary concern should be the relevance and reliability of the information that results, not the effect that the new rule may have on a particular interest. A neutral choice between accounting alternatives is free from bias towards a predetermined result. The objectives of financial reporting serve many different information users who have diverse interests, and no one predetermined result is likely to suit all interests.
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