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Question 4: Definitions of four Principles, Assumptions, or Constraints that Chris and
Logan need to be aware of for financial reporting.
1. Reliability.
They need to be aware that information that they will prepare in the financial statements needs to
be reliable (Penman 22). It means that the information should neither have material errors nor
systematic bias. Systematic bias information is neutral and presented in a way whereby it can
influence the process of decision making. The financial report should faithfully represent the true
information that the two parties agree.
2. Relevance.
Information that is relevant is the one that can influence the users while making their decisions.
The information needs to have a confirmatory or predictive value (Penman 22). Predictive value
is where the information assists the capital providers to create their expectations of the business
in the future. Confirmative value is where it can verify the present evaluations.
3. Understandability.
It means that the capital providers need to comprehend the information that the financial
statements provide for it to become important (Penman 23). Understandability relies on various
factors. First, it depends on the way the statement presents information. Second, the way of
