What Are Some Ways That Accounting Standards Help the Users of Financial Statements?
Accounting standards --- primarily those found in generally accepted accounting principles --- require companies to record and report financial information in a specific manner. Financial statement users often benefit from the principles. A few benefits include accurate financial information, few distortions from inaccurate reporting, full disclosure of accounting process and management comments included with the statements.
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Economic Entity
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Companies must keep personal and business data separate on financial statements. Users benefit from this accounting standard, as all information on the income statement and balance sheet are representative of the company. Individual users also have the ability to review transactions made by executives. For example, publicly held companies must list all executive benefits paid or stock purchases. This information listed on financial statements must relate to the business rather than personal transactions.
Accounting Period
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Financial statements must be for a specific accounting period. Each financial statement must list the dates of the prepared information. Users benefit from this standard, as they can measure how well a company functions compared to other businesses. A comparison is also possible to previous accounting periods. For example, users may decide to compare financial statements from April 2011 to those prepared in April 2010. The use of specific accounting periods makes this possible.
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Cost Information
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External financial statement users require accurate information in a company's information. The cost principle allows users to understand how much a company pays for assets or other items used in operations. Historical cost is often the principle a company uses to record costs. Financial statement users need to know if a company revalues its assets or other information using mark-to-market accounting or other measurement methods to revalue assets.
Disclosure Comments
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Disclosures are comments made in addition to the information released on financial statements. Common disclosures include inventory valuation practices, depreciation calculations, potential lawsuits against business operations or asset impairments. Investors need this additional information to assess a company's financial viability. Companies may also be subject to external reporting requirements regarding disclosures. Users benefit as information disclosed provides further insight into financial figures.
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