Financial statements can be used to judge the financial position of an organization. Profit and loss account and balance sheet form part of the financial statements. While profit and loss account contains information on all the incomes and expenditures of an organization, balance sheet contains information on all the assets and liabilities of an organization.
While financial statements are prepared to provide quantitative information on a company’s overall business performance, financial statements have certain important qualitative characteristics. Qualitative characteristics of a financial statement are the attributes a financial statement must have in order to provide useful information to its users.
Following Are The Qualitative Characteristics Of Financial Statements
Financial statements are used by different stakeholders for different purposes. Investors may require financial statements to analyze the financial strength of the company. Creditors may require financial statements to measure repaying capacity of the company.
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Similarly, management may require financial statements to identify overall profitability in order to formulate expansion and diversification plans. If financial statements do not provide information that is relevant to different groups of users, the overall objective of preparing financial statements is defeated.
Reliability is one of the most important qualitative characteristics of financial statements. Financial statements are said to be reliable when the information contained in such financial statements is complete, accurate and neutral. Information is said to be complete when all business transactions have been properly accounted for and recorded in financial statements.
Information is said to be accurate when business transactions (reported in financial statements) are free from any kind of errors or omissions. In order to ensure that financial statements represent a true and fair picture of the company’s financial position, it is important that financial statements are prepared without any bias, that is, the information contained in financial statements should be free from any kind of manipulations or misrepresentations.
Information provided in financial statements is considered to be useful when it facilitates comparison. Comparability is achieved when information contained in financial statements is consistent, appropriately disclosed, and ensures proper compliance with relevant accounting standards and legal requirements. Comparison of information contained in financial statements can be made for different periods, across different industries and with companies in the same industry.
Understandability is another important qualitative characteristic of financial statements. Financial statements are used by various stakeholders such as management, shareholders, creditors, employees, government, etc. Each of these users may require financial statements for different purposes.
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Understandability means that the information contained in financial statements is easily understood by its users. It is important to note that understandability is dependent on the ability of the user who is analyzing or reading the financial statements. The user should have particular level of aptitude (knowledge and skills) in order to understand the information contained in financial statements.
While providing information in financial statements, it is important to note that the characteristics of relevance and reliability are not affected to make it easily understandable for the users. Therefore, a financial statement can be analyzed both in terms of the quantitative information it provides as well as in terms of its qualitative characterstics.
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