Principles of Accounting

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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
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characterizing a transaction. Additionally, it relies on the capability of the capital providers
assuming that they knew the economic activities of the business during the preparation of
financial statement.
4. Comparability.
It refers to the ability of financial information to enable users to identify differences and
comparison between two collections of accounts (Penman 23). It assists in matching information
that is similar for two periods to liken the performance of entities with their competitors. The
capital providers should be able to recognize the dissimilarity between two account policies. The
policies include the one that an entity adopts in recording a transaction and the one adopted from
one period to another for different entities. Comparability relates to disclosure of policies of an
account and consistency.
Work Cited
Penman, Stephen H. "Financial reporting quality: is fair value a plus or a minus?." Accounting
and business research 37.sup1 (2007): 33-44.

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