Essay: Understandabilty of Financial Statements

Sample Essay

Understandabilty of financial statements means that accounting information presented in these statements should be comprehensible and easily understood by decision makers. If the information is reliable and relevant but cannot be understood by the decision maker it is useless for any decision. The activities and functions in a business have become quite complex and reporting of these activities in a comprehensible manner becomes more difficult. In such cases accountants should amply explain all aspects of these activities in notes that follow financial information as a support mechanism. If the users of financial and accounting information are not able to understand this information and any underlying concept there is no use in presenting this information to them in the first place (Meigs 2008).

Understandability entails that the users of financial statements fully comprehend all information that is present in financial statements and to increase this comprehension, explanations of accounting procedures is presented in notes to the accounts. The enclosure of notes with financial statements is though an advantage and proves useful for decision makers but there are also significant accounting measures and procedures used by the company which may be unclear and eventually cause poor decisions to be made. Several companies also include financial ratios in their statements to increase the understandability of financial information but presentation of some ratios and retention of others may also cause problems for investors as they would interpret the earnings and position of the company based on presented ratios.

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