The details of an accounting information system must contain the essentials necessary to satisfy the user’s needs. What the general public looks forward in the published accounts of an organization is (i) reliability (ii) relevance. Normally, a balance sheet gives the comparative figures for two consecutive years. To evaluate the liquidity position of an organization, the accounting system must include data on current assets and current liabilities apart from qualitative information about them.
As for Qualitative characteristics of Accounting Information, relevance as mentioned above is subdivided into (i) predictive value (ii) feed-back value, and (iii) timeliness. This information provides assistance to the users in predicting the future and provides feedback on past decisions. “Investors use EPS data to assess the future earnings potential of an enterprise because EPS data have predictive value. Investors can assess the quality of their past decisions by looking at present EPS data. And, needless to add, the EPS data must be available at the appropriate time to be used for either of these functions.” (Annual….)
The reliability quality has been subdivided into (a) verifiability, (b) represent faithfulness, and (c) neutrality. The important virtue of an accounting system is the information contained therein must be available for verification, with proper supporting evidence. Accounting information needs to give the true picture of an enterprise. The picture given must be near perfect and it must pass the reliability test as well. It must be the unbiased professional estimation. Each enterprise wishes to show profits but manipulated profits are worst than the loss. A balance sheet prepared with the hidden agenda to mislead the investors is a futile exercise and will have damaging influence in the long run, provided such a company will actually have the long run.
The important aspect that serves as the control function in the annual accounting reports is to provide adequate information for liquidity evaluation. Besides, information about net income or earnings per share (EPS) is necessary as it is the measure on stockholder’s investment. To examine the profitability aspect, net income data and EPS data are relevant. Historical accounting information is relevant for assessing past performance only; it has no other utility. Forecasts, to predict future profitability or liquidity are not usually included in accounting reports. Explanation about the future expansion programs is not forecast.
By adherence to accounting principles, you ensure reliability in accounting information. That is to stick to faithfulness, consistency and trustworthiness. An independent audit of accounting reports is the important part to carry checks on the reliability of information provided in the reports. EPS data are important from the point of view of the investors. They are in a position to assess the quality of their past decisions by looking at present EPS
Decision model-accounts:
Apart from the facts contained in the statement of accounts, numerous factors will influence decision of the investors. To make a sound decision, you need to evaluate the various options and be in a position to collect more direct information. If you have made confident and correct decisions in the past, that will increase your confidence.
“It is often best to use a planned decision-making style when making important or complicated decisions. In other words, gather information and apply a systematic and deliberate approach that is a balance between logical reasoning and intuition. A planned approach takes time and energy but is worthwhile when you have to make important decisions. You will also be more confident with the decision if you know you have done your homework and it feels right intuitively.” (Decision….)
As for equity investor’s group related control function, a regular program of communication with all the shareholders, large, small, institutional and private is desirable in an ideal company. Take the example of Pearson. Read what they say in the annual report related to the year 2004. “We post all company announcements on our website, www.pearson.com, as soon as they are released, and major shareholder presentations are made accessible via webcast or conference call. Our website contains a dedicated investor relations section with an extensive archive of past announcements and presentations, historical financial performance, share price data and a calendar of events. In 2004, we continued our program of educational seminars for our institutional shareholders focusing on individual parts of Pearson. The seminars are available to all shareholders via webcast on www.pearson.com.”(Pearson…) With such a wealth of information available at fingertips, it is possible for the investor to take quick, appropriate decisions.
