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The qualitative characteristics of financial report preparation - Essay Example

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The researcher focuses on the qualitative characteristics of financial report preparation. The research centers on materiality, prudence, reliability, and relevance characteristics. The financial information must compulsorily abide by established qualitative characteristics…
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The qualitative characteristics of financial report preparation
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The qualitative characteristics of financial report preparation

This essay discusses that qualitative characteristics influence the financial information’s effect. The users of the financial information rely on the qualitative characteristics of the financial statements for their decision making activities. The creditors use the financial statements as one of the tools for deciding whether to grant loans or credit terms to the credit applicant. Financial statement indicating the company generated a profit trend for the past two years will persuade the creditors to grant the loans or credit applications. The net profit portion of the financial statements indicates the company will be able to pay its maturing loan and credit obligations on time. On the other hand, the creditors will be discouraged to approve the credit or loan application of a company having a net loss financial picture. The net loss financial picture indicates a strong probability that the company may close shop in the next few years. The credit or loan applicant may not be able to comply with its duty to pay its loans or credits when the maturity dates crop up. In addition, the customers use the financial statements as one of the major tools for deciding whether to grant loans or credit terms to the credit applicant. The customers use the financial statements to determine if the company will stay long enough to supply their wants, needs, and caprices. A financial statement indicating a loss will persuade the client to start looking for other competitor suppliers. A net loss figure creates an impression on the minds of the customers that the company may not qualify as a going concern entity. A net profit ensures the customers that the company will provide the clients’ needs. Furthermore, the managers use the financial statements as one of the major tools for benchmarking their performance. The managers will have a passing performance grade if the financial statements indicate the company generated net profits during the past year or years of supplying the needs of its clients. On the other hand, the manager will receive a failing performance grade if the financial statements indicate the company generated a net loss for the past year or years of service. The managers need financial statements that obey with the qualitative characteristics standard. Also, the current and prospective investors use the financial statements as one of the major tools for deciding whether to grant loans or credit terms to the credit applicant. The current and prospective investors will be encouraged to invest their hard earned cash in the company, if the financial statements indicate the company generated profits for the past year or years of service. On the other hand, the current and prospective investors will be discouraged to invest in a company that generated a trend of net loss for the past year or years of operation. The current and prospective investors need financial statements that comply with the qualitative characteristics standard. Based on the above discussion, the entities must resolve the threshold quality of materialityiv. Materiality is not easy to define and can be misunderstood. The financial information is material if the omission or misstatement could influence the economic decisions of the financial sta ... Read More
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