The Accounting Coach website gives this example: Suppose you want to upgrade your aging factory equipment. The original cost isn't relevant to your decision but the price of new equipment and any money it will save you — it uses less power, it's faster, needs fewer repairs — is definitely relevant.
If you're choosing among raw materials suppliers, the cost is normally relevant, but it isn't if they all charge the same. Four secondary concepts enhance the relevance of accounting. It should be understandable rather than smothered in jargon. It should be verifiable; another accountant could take the same raw data and get the same results.
It should be comparable; if you can't compare your quarterly reports to the competition, you can't judge how you're doing. The fourth secondary concept in the list of accounting concepts and principles is timeliness. The longer accounting information takes to reach you, the less the relevance of the accounting, warns Accounting Tools. Reviewing your quarterly performance a week after the quarter closes makes the figures relevant.
If your accountant gives them to you a year later, the relevance of the accounting is gone. The relevance of accounting depends on what you use it for. Cost projections for opening a new store are relevant if you're growing and expanding. A company controller decides to accelerate the month-end close, so that she can issue financial statements in three days, rather than the old standard of three weeks. This improves the speed with which various internal and external parties receive the financial statements, which improves the relevance of the information they receive.
The industrial engineering manager is considering the installation of a new, higher- capacity machine in the production area. If the sales department issues a new forecast that shows a decline in sales , this has great relevance to the engineering manager's decision, since it may no longer be necessary to acquire such a high-capacity machine.
A company is contemplating the acquisition of another firm. If the acquiree reveals that it has a previously undocumented and material liability , this is relevant to the decision of the acquirer in regard to whether it should extend an offer to buy the acquiree, and the price it is willing to pay.
A financial statement Financial Statement Financial statements are written reports prepared by a company's management to present the company's financial affairs over a given period quarter, six monthly or yearly. These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. Many stakeholders also use past financial statements to analyze the future performance of the company regarding profitability.
It should be of accurate data following accounting standards. Any inaccurate information may be misleading. This kind of information cannot be of any use for the company in making decisions. In short, accounting relevance should contain accurate and orderly information. The relevance of accounting numbers depends on the person using it. And it will hold more meaning if it has been used over some time and more useful if one understands the generally accepted accounting principles The Generally Accepted Accounting Principles Generally accepted accounting principles GAAP are the minimum standards and uniform guidelines for the accounting and reporting.
These standards prohibit firms from engaging in unethical business activities and enable for a more accurate comparison of financial reports to investors.
This article has been a guide on Relevance in Accounting. Here we discuss examples of relevance in accounting and how it is useful to managers, small shareholders as well as large shareholders. You can learn more about accounting from the following articles —.
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