Qualitative Characteristics of Financial Statements

 

 

          Basically, every company is required to create financial statements which are then given to their shareholders for the viewing of the company performance. It is important that the shareholders have a clear understanding to what is written in the financial statement. Therefore, certain important characteristics must be implemented into the financial statement to enhance the understanding of the shareholders.

 

        One of the most important factors needed in the financial statement is Understandability. Understandability means that information in the financial statement is easily understandable to users. As sometimes financial statements can be somewhat complicated to understand, companies have been able to use understandability to makes sure that information in financial statements are clearly presented with additional information for clarification. However, some information that contains complex matters can be added in the financial statement too but it must be something with important material. To solve this problem, companies will usually add on pictures in their financial statements to give shareholders a better understanding in what the company does.

Another important factor needed is Relevance. Financial Statements need to add on relevance in their financial statement to ensure information is relevant to users which may influence their decision making. This is extremely important for investors in whenever they feel like reviewing past financial statements and ensuring their decision of whether they will invest or not in the future.

Comparability is also an important characteristic in the financial statement. This means that treatment of transactions must be consistent throughout an entity and over time for that entity. Comparability has been applied to ensure users are able to identify their performance and financial position in the reporting entry.

 

        Neutrality is also needed in financial statements. The information contained in financial statements must be neutral, which is free from bias. If it is not, there is a huge possibility that the information influences the decision in order to achieve a predetermined result or outcome.

 Another qualitative characteristic which is important is Completeness. Completeness has to be applied to ensure that information in the financial reports should be complete to avoid confusion. This is crucial especially for the figures in company reports.

 

       The final characteristic that is needed is Prudence which is very important qualitative characteristic needed in the financial statement. This means that accountants must be cautious especially when dealing with uncertainty such as assets or income so they are not to be overstated and liabilities or expenses are not understated. Therefore, companies have to do strict background checks in making sure that they hire qualified accountants to have them check the company financial statements thoroughly.