Five characteristics of financial statement
To determine the five characteristics of financial statements, one can refer to the Generally Accepted Accounting Principles (GAAP). These principles provide guidelines for the preparation and presentation of financial statements to ensure consistency and transparency. The five characteristics of financial statements are:
1. Relevance: Financial statements should provide information that is useful for decision-making by users. This means that the information should have the potential to influence the decisions of users by helping them evaluate past, present, or future events.
2. Reliability: Financial statements should be reliable and free from bias or errors. This requires the use of established accounting principles and methods of measurement that are consistently applied.
3. Comparability: Financial statements should be prepared in a manner that allows for comparison across different periods or with other companies. This allows users to identify trends in performance and make informed assessments.
4. Understandability: Financial statements should be presented in a clear and concise manner, using language and terms that are easily comprehensible to users who have a reasonable knowledge of business and accounting.
5. Faithful Representation: Financial statements should accurately represent the financial position, performance, and cash flows of an entity. This means that the information should be complete, neutral, and free from material misstatements.
To ensure these characteristics are met, companies typically engage in rigorous accounting practices, such as maintaining accurate records, following appropriate accounting standards, and subjecting financial statements to independent audits.