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Chapter 1: Question 5Q (page 22)

Briefly explain the meaning of decision-usefulness in the context of financial reporting.

Short Answer

Expert verified

Decision usefulness is the approach adopted by the accountants while preparing the financial report with the objective of assisting the current and potential investorsin making decisions regarding investments.

Step by step solution

01

Understanding the financial reporting

Financial reporting is the process of disclosing vital financial data to present the actual financial position and performance of the business. It is an important process carried out regularly by every business firm.

02

Learning the importance of financial reporting in the decision-making process.

Decision-making is a vital process that every stakeholder must carry out to earn more revenue from the business. Financial reporting is a key player in the decision-making process as it provides relevant financial data needed to make important business decisions. This emphasizes the need toprepare financial reportsmost efficiently and honestly.

So, the decision usefulness approach of financial reporting directs the accountant to make the right financial and accounting choices.

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Most popular questions from this chapter

(GAAP and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false.

  1. The objective of financial statements emphasizes a stewardship approach for reporting financial information.
  2. The purpose of the objective of financial reporting is to prepare a balance sheet, an income statement, a statement of cash flows, and a statement of owners鈥� or stockholders鈥� equity.
  3. Because they are generally shorter, FASB interpretations are subject to less due process compared to FASB standards.
  4. The objective of financial reporting uses an entity rather than a proprietary approach in determining what information to report.

Question: CA1-12 GROUPWORK (GAAP Terminology) Wayne Rogers, an administrator at a major university, recently said, 鈥淚鈥檝e got some CDs in my IRA, which I set up to beat the IRS.鈥� As elsewhere, in the world of accounting and finance, it often helps to be fluent in abbreviations and acronyms.

Instructions

Presented below is a list of common accounting acronyms. Identify the term for which each acronym stands, and provide a brief definition of each term.

(a) AICPA (e) FAF (l) FASB(b) CAP (f) FASAC (j) SEC(c) EITF (g) GAAP (k) IASB(d) APB (h) CPA

Question: What is the benefit of a single set of high-quality accounting standards?

The authoritative status of the conceptual framework is as follows. (a) It is used when there is no standard or interpretation related to the reporting issues under consideration. (b) It is not as authoritative as a standard but takes precedence over any interpretation related to the reporting issue. (c) It takes precedence over all other authoritative literature. (d) It has no authoritative status.

Presented below are three models for setting GAAP.

  1. The purely political approach, where national legislative action decrees GAAP.
  2. The private, professional approach, where GAAP is set and enforced by private professional actions only.
  3. The public/ private mixed approach, where GAAP is basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies.

Instructions

  1. Which of these three models best describes standard-setting in the United States? Provide justification for your answer.
  2. Why do companies, financial analysts, labor unions, industry trade associations, and others take such an active interest in standard-setting?
  3. Cite an example of a group other than the FASB that attempts to establish accounting standards. Speculate as to why another group might wish to set its own standards.
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