Financial Accounting for Decision Makers

Activity 1.6
Accounting information should contain 
both
of these fundamental qualities - relevance and 
faithful representation – if it is to be useful. There is usually little point in producing information 
that is relevant, but which lacks faithful representation, or producing information that is irrel-
evant, even if it is faithfully represented. Nevertheless, a trade-off between relevance and 
faithful representation may sometimes have to be made. Where, for example, an estimate of 
some future financial commitment is highly uncertain, it may not reflect a totally faithful por-
trayal of the item. This estimate may, however, be the most relevant information available. In 
such a situation, it may be better for users to receive the estimate, along with a description 
of the uncertainties that surround it, rather than receive no estimate at all.
M01 Atrill's Financial Accounting For Decis 51257.indd 7
18/03/2019 10:29

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8
CHAPTER 1
INTRODUCTION TO ACCOUNTING
Further qualities
Where accounting information is both relevant and faithfully represented, there are other 
qualities that, if present, can enhance its usefulness. These are 
comparability
, 
verifiability
, 
timeliness
and 
understandability
. Each of these qualities is now considered.
■ 
Comparability.
When choosing between alternatives, users of accounting information seek 
to make comparisons. They may want to compare performance of the business over time 
(for example, the profit for this year compared to that for last year). They may also want to 
compare certain aspects of business performance (such as the level of sales achieved 
during the year) to those of similar businesses. To help users make comparisons, items 
that are alike should be treated in the same way – both over time and between businesses. 
Items that are not alike, on the other hand, should not be treated as though they are. Users 
must be able to detect both similarities and differences in items being compared.
■ 
Verifiability.
This quality provides assurance to users that the accounting information pro-
vided faithfully portrays what it is supposed to portray. Accounting information is verifiable 
where different, independent experts can reach broad agreement, that it provides a faithful 
portrayal. Verification can be direct, such as checking a bank account balance, or indirect, 
such as checking the underlying assumptions and methods used to derive an estimate of 
a future cost.
■ 
Timeliness.
Accounting information should be made available in time for users to make 
their decisions. A lack of timeliness undermines the usefulness of the information. Broadly 
speaking, the later accounting information is produced, the less useful it becomes.
■ 
Understandability.
Accounting information should be presented in as clear and as concise 
a form as possible. Nevertheless, some accounting information may be too complex to be 
presented in an easily digestible form. This does not mean, however, that it should be 
ignored. To do so would result in reporting only a partial view of financial matters. (See 
Reference 1 at the end of the chapter.)
Accounting reports are aimed at users with a reasonable knowledge of accounting and 
business and who are prepared to invest time in studying them. Do you think, however, 
that accounting reports should be understandable to users without any knowledge of 
accounting or business?
It would be very helpful if everyone could understand accounting reports. This, however, is 
unrealistic as complex financial events and transactions cannot normally be expressed in 
simple terms. Any attempts to do so are likely to produce a very distorted picture of 
reality.