Determine the evidence on the usefulness of accounting, Financial Accounting

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Evidence on the usefulness of accounting

There are convincing evidence and arguments that accounting information is at least perceived as being useful to users. Various research surveys have asked users to rank the significance of accounting information, in relation to other sources of information, for decision-making purposes. Normally, these studies have found that users rank accounting information very highly. There is also substantial evidence that businesses choose to produce accounting information which exceeds minimum requirements imposed by accounting regulations. (For instance, businesses often produce a considerable amount of accounting information for managers that isn't needed by any regulations.) Apparently, cost of producing this additional accounting information is justified on the grounds that users find it useful. Such arguments and evidence, though, leave unanswered the question of whether information produced is actually used for decision-making purposes, that is: does it affect people's behaviour? It's generally very difficult to assess impact of accounting on decision making. One situation arises, though, where impact of accounting information can be observed and measured.

This is where shares (portions of ownership of a business) are traded on a stock exchange. Evidence reveals that, when a business makes an announcement concerning its accounting profits, prices at which shares are traded and volume of shares traded often change significantly. This suggests that investors are changing their views about future prospects of the business as a result of this new information becoming available to them and that this, in turn, leads them to make a decision either to sell or to buy shares in business.

Even though there is evidence that accounting reports are perceived as being useful and used for decision-making purposes, it's impossible to measure how useful accounting reports are to users. Consequently we can't say with certainty whether cost of producing those reports signifies value for money. Accounting information will generally signify only one input to a particular decision and so precise weight attached to the accounting information by the decision maker and benefits which flow as a result can't be accurately assessed. We shall now go on to see, though, that it is at least possible to identify kinds of qualities which accounting information should possess in order to be useful. Where these qualities are lacking, usefulness of the information would be diminished.

 

 


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