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Accounting information based on the financial reports for example, are very crucial for the business owners as they can provide various information whether by quantitatively or even qualitatively. From the financial report, we can get the information by extracting them from the accounting process such as recording, reporting and financial transactions. Accounting information is one of the tool for the businessman as they can use it to improve their company's strategy performance and look for ways to improve current business operations. Moreover, they also can reach their goal that is maximizing the profit but with minimize cost.
Financial accounting usually represents the company's performance, total financial transactions such as revenue, cost, expenses in the financial statement and assets and liabilities in the balance sheet. The management often prepare this financial information to review how well their company generates profits from the amount of business expenditures. From this information, they will make a budget for the next year running cost.
Accounting information has quantitative and qualitative characteristics. Quantitative characteristics are the calculation of financial transactions while qualitative characteristics include the company's perceived importance of financial information. The management especially the top one often require financial information when making business decisions. Incorrect information can have a major impact on the decision-making or cause the management to make incorrect assessments about their companies.
Qualitative research gathers information that is not in numerical form.Â Qualitative data is usually descriptive data therefore it is harder to analyze than quantitative data.
Figure 1 shows the qualitative characteristics, presented in hierarchy form of their perceived importance. The main focus, as stated in the first concept statement is onÂ decision usefulness that is the ability to be useful in decision making.Â The meaning of understandability is users must understand the information or knowledge within the context of the decision-making . This is a user-specific quality because users will differ in their ability to comprehend any set of information
Figure : Hierarchy of Desirable Characteristics of Accounting Information
Primary Qualitative Characteristics
For primary decision, the critical qualities that make accounting information useful are (i) relevance and (ii) reliability. No matter how reliable the information are but not relevant to the decision at hand, it is still useless. Contrariwise, relevant information is of little value if it cannot be relied on. Below are the components that make those qualities desirable:
In order to make a difference in the decision process, information must own predictive value. Usually, useful information will own both of the qualities. For example, if net income and its components verify investor expectations about future positive cash-flow ability, then net income has feedback value for investors.
Timeliness is also one of the important components of relevance. Information is considered as timely when it is available to users as soon as possible to allow the information to be used in the decision process. The essential for timely information requires that companies provide information to external users such as the investor on a periodic basis. The Security Commission (SC) requires its registrants that is the companies to submit financial statement information not only on an annual basis, but quarterly for the first three quarters of each fiscal year too.
Reliability is the point to which information is neutral, verifiable, and also representationally faithful. Verifiability means a consensus among different measurers. For instance, the historical cost of a piece of land to be reported in the balance sheet is usually highly verifiable. The cost can be tracked to a transaction, the purchase of the land. However, the market price of that land is much more difficult to verify. The term objectivity often linked to verifiability. The historical cost of that land is objective but the land's market value is subjective as it is influenced by the measurer's past experience and biases. A subjective measurement is hard to verify, which makes it more difficult for users to rely on.
Representational faithfulness exists when there is an agreement between a measure and the phenomenon it purports to portray. For example, assume that the term inventory in a balance sheet of a retail company is understood by external users to represent items that are intended for sale in the ordinary course of business. If inventory includes machines that are producing the inventory, then it lacks representational faithfulness.
Reliability assumes the information being relied on is neutral with respect to parties possibly affected whether they are the internal or external parties. Therefore, neutrality is highly related to the founding of accounting standards. Accounting standards should be established with overall societal goals and specific objectives in mind and should avoid biases by try not to favor particular groups or companies.
The qualities of relevance and reliability often conflict with each other. For instance, a net income forecast provided by the administration of a company may possess a high degree of relevance to investors and creditors who are trying to predict future cash flows. However, a prediction necessarily contains subjectivity in the estimation of upcoming events.
Secondary Qualitative Characteristics
As for the secondary qualitative, the characteristics are (i) comparability and (ii) consistency and they are important for decision making. Comparability is the ability to help users see resemblances and differences between events and conditions. Closely connected to comparability is the notion that consistency of accounting practices over time permits valid assessments between different time-frames. The predictive and feedback value of information can only be enhanced if users can compare the performance of a company throughout the time.
Figure 2 shows the types of quantitative information in accounting.
Quantitative information is information which is expressed in digits or numbers. For example, a sale transaction can be expressed in number when Jacob purchased goods from the business. To be more specific, the transaction can be expressed as Jacob purchased goods from the business for RM2, 000.
Accounting information is the information which can be expressed in monetary amount. Under it are the three main components which are:
i) Financial information
Financial information is accounting information that can be useful for managers or other external parties for decision making.
ii) Operating information
Operating information are information which are required to know daily operating transactions.
iii) Management information
Management information is the information which is meant for the managers of the company only.
Qualitative data is not objective therefore it cannot be reliably verified. On the contrary, quantitative data can be verified often by seeing the evidence on paper that the data is accurate. For example, a company's information system recorded that one of their customer said that they liked the flavor of the ice cream in vanilla. The information user would find it very difficult to prove that that customer really said that. On the other hand, the cost of raw materials entered in the accounting records can be proven against the data on the invoices received from the suppliers. However, the management should not restrict them from processing financial and other quantitative data. They need to be more flexible, keen to embrace new sources of data that can enable them to provide better information.
PART 2 (ii)
Decision making is "the thought process of selecting a logical choice from the available options. When trying to make a good decision, a person must weight the positives and negatives of each option, and consider all the alternatives. For effective decision making, a person must be able to forecast the outcome of each option as well, and based on all these items, determine which option is the best for that particular situation." Figure 3 shows the six steps taken in order to make decisions.
Step 1: Identifying the problem
The most important step in any decision making process is describing why a choice is called for and identifying the most wanted consequences of the decision making process. The first thing that needs to do is state the underlying problem that has to be solved. After the decision has been made, the desired outcome must be stated clearly. This is one of the good ways to start since by stating your goals would help you in clarifying the thoughts.
Step 2: Determining alternative courses of action
The situation of making a choice arises because there are many substitutes available for it. Hence, the next step after the earliest one is to state out the alternatives available for that situation. The key to this step is: do not limit or restrict yourself to typical alternatives or what has worked in the past but to be open to new and better options. This is essential as the solutions sometimes can come out from these out-of-the-box ideas. In order to solve this problem, you need to do adequate research to come up with the brilliant facts.
Step 3: Analyzing the alternatives
It is common if you find positive or negative cones at the same time for each of the alternative during the evaluations. It is unusual to find one alternative that would totally resolve the problem and is heads and shoulders better than the rest. While considering both pros and cons in each alternative, you must be careful to differentiate between what you know as a fact or what you believed to be happening. The decision maker will only have all the facts in small cases. People always complement what facts they have with assumptions and beliefs. This difference between fact-based evaluation and non-fact-based evaluation is included to assist the decision maker in developing a "confidence score" for each substitute. The decision maker needs to define not just what results each substitute could yield, but how likely it is that those results will be realized. The more the assessment is fact-based, the more confident he can be that the predictable outcome will occur.
Step 4: Selecting the best alternatives
Selecting the best alternative is the stage where all of your hard work that you have put in analyzing would lead to a proper decision. This procedure would help you with clearly looking at the available options and have to choose whichever you think is the most relevant. You can also club some of the options to come out with a better solution instead of just picking out any of them. When the decision maker is working in a team environment, this is where a proposal is made to this team, complete with a clear description of the problem, a clear list of the substitutes that were considered and a clear rationale for the proposed solution.
Step 5: Implement the decision
While this might seem obvious, it is necessary to make the point that deciding on the best alternative is not the same as doing something. The action itself is the first real, physical step in changing the situation. A decision only counts when it is applied. This is a very critical step as all people that involved in the implementation of a solution should know about their consequences. This is very essential for the decision to give successful results.
Step 6: Evaluate the decision
Decision making procedure does not end with just making a decision and implementing it. The decision made and also that have been implemented must be monitored regularly. At this stage, you have to keep a close eye on the progress made by applying the solutions. You also need to measure the results of implementations against your expected standards. Monitoring the solutions from the beginning stage may also help you to alter your decisions if you notice deviation of results from your expectations. At first, these steps may seem very complexes but these are the important decision-making methods that would guide you in the taking right decisions in your personal as well as professional life. Moreover, decision-making is a ongoing process and will never come to an end.
The Impact of Qualitative Characteristics in The Decision-Making Process
In the flow process, whether that description is a faithful representation of the relevant situation, including representing the item, being faithful in that representation, and being neutral and verifiable are taken to consideration. This process is also iterative (the repetition of a process) by finding that a description is not a faithful representation triggers a search for other possible relevant descriptions, which might be a different description of the same phenomenon or a description of a different phenomenon. If other portrayals are possible, the process need to be reversed in order to pick from the other descriptions the next most relevant one. If no faithful representation of a relevant phenomenon can be established, that could be the end of the process as there is no point in reporting information. Same goes to a relevant situation, if that information is unverifiable or biased assertion. Alternatively, the process could continue to the next step if the absence of faithful representation is disclosed in the financial report only if the information that is relevant but is unavoidably non-representative biased, unfaithful, or unverifiable and it is better than no information at all.
The next element to take for consideration in the process is to assess whether the depiction of the item is comparable. Comparability is the feature that allows users of financial reports to identify similarities in and differences between the economic situations of the company's reports trying to portray. The purpose of consistency is to achieve comparability which means that consistency must come to an end, whereas comparability is the desired end.
Any comparability consideration must come after relevance and faithful representation. If economic situation are irrelevant to users of financial statements, or the portrayal of an item does not faithfully represent real-world economic situation then there is no need to consider comparability since irrelevant phenomena and depictions that are not a faithful representation are unuseful for decision-making.
The next element for consideration in the process is whether the faithfully representative and comparable depiction of the phenomenon with predictive or confirmatory value is understandable. Understandability is the quality of information that allows users who have knowledge in business, economic, accounting and who study the information with reasonable diligence to understand its meaning. Understandability is improved when information is gathered, classified, characterized, and presented in a clear and concise manner. Correct information should not be excluded as it is too complex or difficult for some users who does not has the required knowledge to understand.
Understandability calls for a different iterative process than the other qualities. To provide a non-understandable portrayal of an event is intolerable. That would waste the users' time and possibly misinformed them, and it is entirely avoidable by standards that call for understandable information and due care in executing those standards. Therefore, the process needs to improve the depiction until it is understandable.
Comparability Including with Consistency
Comparability also needs to be considered at the summative level. The focus is on the manner in which the aggregate of items is presented. In many cases, this will result in displaying items in a consistent manner. However, consistency should not be applied blindly, to the loss of improved relevance, faithful representation or understandability.
If the aggregation does not show matters in a comparable way, the process calls for consideration of alternative ways of aggregation. For example, if information on expenses totaled by function such as cost of sales and marketing is judged to impede comparability with other entities that aggregate differently, the alternative of aggregation by nature such as purchased goods, salaries and interest might be considered.
Understandability, Including Being Clear and Concise
The next step is to evaluate the understandability of the aggregated presentation. To be more precise, to evaluate whether the overall display and disclosure of the reportable item is clear and concise.
Being concise means narrowing down what is reported so that what really matters is not covered by immaterial information. Standard setters and preparers need to keep in mind that the accumulation of information must be balanced with providing adequate information such that the meaning of the information is delivered. In some cases, more information will be needed rather than less. While in other situations, less information might be more understandable.
If information is not understandable because it is vague, then consideration should be given as to whether there is a better way to portray the information for example use of a list or chart instead of a paragraph. Descriptions written in simple language are generally more understandable to more users than those that include legal or industry-specific terminology.
An alternative that is more clear and concise could result in a bigger number of users understanding the information. After an alternative is established, then the process needs to check the completeness, comparability and faithful representation of the new accumulation. This process calls for enhancing the depiction until it is understandable.
Timeliness is making information accessible to decision makers before it loses its capability to influence their decisions. If the information only available after the time of decision making, it has no capability to influence that decision and thus lacks relevance. By using timeliness alone cannot make information relevant, but a absence of timeliness can rob information of relevance it might otherwise have had.
Some propose that timeliness might mean whether the information was current or dated. For instance, whether items are measured based on present or historical prices. However, most personnel understand that part of a different aspect of relevance such as how much predictive value or confirmatory value the information delivers. Many would say that information based on current prices or market prices has more predictive value and some would say it has more confirmatory value than information based on historical prices. However, some might concerned that insistence on timeliness might exclude valuable but dated pieces of information that came to light late for example discovery of an old claim.
Timeliness comes into play only at the end of the aggregation process that produces the financial report. If the process takes too long, the whole work may be entirely wasted as the investment or credit decisions may already have been made without the assistance of the financial report. Immediate reports of flawed information are likely to be less useful than somewhat delayed reports of information without such flaws.