Accounting information should be relevant I.e. has the capacity to affect investors’ beliefs about future returns.
Accounting information should be reliable i.e. should faithfully represents what it purports to measure. It should be precise and free from bias.
To provide information to help present and potential investors and creditors in assessing the amounts , timing and uncertainty of prospective cash receipts from dividends or interest.
Information Asymmetry exists between the parties in business transactions. The managers ( agents) have more information than the investors (principals).
Relevance and Reliability
To be useful, accounting information should provide an informative information system that links current financial statements with future state realizations and payoffs.
Decision Usefulness Approach
Section 1000 of CICA Handbook (par. 1000.15):
The objective of financial statements is to communicate information that is useful to investors, members, contributors, creditors and other users…in making their resource allocation decisions and/or assessing management stewardship.
ccounting Principles -1
Historical Cost Principle i.e. recognise (record and report) assets and liabilities initially at the cash-equivalent cost.
Revenue Recognition Principle i.e. recognise revenues when earned (earning process is complete and an exchange has taken place ). All necessary costs have been incurred and collection is assured – usually at point at sale.
Information Economics Approach and Efficiency of capital markets
WorldCom, Enron and Arthur Andersen Incentives of Management to Manage
Earnings
Information Economics Approach
Elements of Financial Statements
Assets: Probable future economic benefits obtained or controlled as a result of past transactions.
Liabilities: Probable future sacrifices of economic benefits
Owner’s Equity: residual Interest in assets after deducting liabilities i.e. A= L + O.E. or O.E = A – L.
Revenues: inflows of assets (or settlement of liabilities) arising from the entity’s major or ongoing activities.
Managers may attempt to select policies or to release biased information that benefit themselves to the expense of the owners .
Role of Accounting: to provide information useful for rational decisionmaking.
Objectives of Financial Statements
Statements of Financial Accounting Concepts (1978) (SFAC 1):
To provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.
北美财务报告(英文版)(ppt 33页)
Outline of Presentation -1
Roles of standard setting bodies (FASB, CICA), Managers, Auditors and Suppliers of Capital (Investors and Creditors or lenders) [See Diagram]