USE OF FINANCIAL ACCOUNTING INFORMATION

Appropriate use of financial accounting information requires a knowledge of the characteristics and limitations of financial accounting. Financial accounting information is produced for certain purposes by the use of conventional principle. Use of the information for other purposes of without a general knowledge of its characteristic and limitations may lead to misinterpretation and errors.

An important characteristic of financial statements, for example, is that the information they contain describes the past, while decision making is oriented toward the future. A record of past events and a knowledge of past position and changes in position, however, help users evaluate prior decisions and this information is also a starting point for users in predicting the future. Decision makers should not assume, however, that the conditions that produced past results will necessarily continue in the future.

Financial statements are designed to provide an important part of the information that users need for many of their decision. The information contained in the statements should not be relied on exclusively, however, and should be supplemented by other information about the specific prospects of the company, the industry in which it operates, and the economy in general.

A knowledge of the characteristics and limitations of financial statements also helps users avoid putting undue reliance on single measures or the results of a single year, for example, should not be overemphasized since these amounts are derived from complex computations, are based on estimates and judgments, and often have their meaning modified by information in the notes to the financial statements. In reaching decisions users should consider movements and judgments, the possible effects of information disclosed in notes and similar factors.
Reference: Commerce Clearing House, Inc, Chicago, 1980, “Professional Standards Volume 3 Accounting”.