Knowing the objectives of financial accounting can make the difference between just being a bean-counter and really understanding what your business is doing. Accounting standards can seem foreign and arbitrary, but by learning the conceptual framework you will have the conceptual background to understand the theory of accounting rules without having to resort to wrote memorization. The objective of financial accounting is to provide information to the end user, but the conceptual framework, or Statements of Financial Accounting Concepts (SFAC), tells us what qualities that information must have.
For information to be useful to end users, it must be relevant. That means that it must help a financial statement reader to make decisions about the financial well-being of the company. For investors, this historical look back serves to help make investment decisions. To be relevant, information must also be current. Companies report financial results on a quarterly or annual basis to satisfy this objective. End users need the most recent information possible to make the best decisions.
Accounting information must be reliable. If a company does not produce reliable financial statements, then investors are unable to gain the information they need to make decisions. Reliable information is able to be verified, is free of bias and is not misleading. In order to help companies meet this objective, public accountants will independently verify accounting treatments and transactions and issue opinions of the basis of these audits. This makes end users more comfortable with their reliance on financial information.
A secondary quality of financial information is that it must be comparable. This is why we have an established system of recording and reporting accounting information. Investors frequently are presented with choices in where and when to invest. By having comparable data, these investors are able to make relative judgments about their investment opportunities. However, comparability, being a secondary quality, must play second fiddle to relevance and reliability.
Consistency is another secondary quality of financial information. Because end users are often provided with financial information that spans various periods of time, it is important for these users to be able to compare information across financial periods. As standards change, and as businesses change, it will not always be possible to have information that is completely consistent. However, when accounting information is not consistent, standards require disclosure of the inconsistency. This is an example of the primary quality of reliability taking a front seat to the secondary quality of consistency.
John Freedman's articles specialize in management and financial responsibility. He is a certified public accountant, graduated summa cum laude with a Bachelor of Arts in business administration and has been writing since 1998. His career includes public company auditing and work with the campus recruiting team for his alma mater.