Relevance, Reliability, and Consistency in Financial Reporting

School: Grand Canyon University - Course: ACC 502 - Subject: Accounting

Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) give companies financial statement preparation guidance so that they can produce information that is beneficial to external users (Young et al., 2019). One component of GAAP and IFRS standards isqualitative characteristics, dealing with thequalitiesof the information contained in a company's financial report. The three qualities are relevance, reliability, and consistency (Young et al., 2019). Therelevancequality of financial information means that the information produced must be beneficial to the external user in predicting the company's future, more than if the information was not available (Young et al., 2019). The information must also be made available within a reasonable time frame so that it can be applied to current decision-making processes (Young et al., 2019). The Goh et al., (2019) study concerning relevance of financial reporting in the gaming industry revealed that financial reporting is, as expected, value relevant for investing and valuation decisions. But the study also revealed that capital markets place higher market premium on casinos with more table games than casinos that have more slot machines (Goh et al., 2019). Firms with access to international markets make all of their revenue from table games and take a loss on slot machines, while domestic firms benefit from having both table games and slot machines (Goh et al., 2019). So, it seems that slot machines can attract customers who will spend money on other services and enhance a domestic firm's revenue, but international customers are drawn to table games (Goh et al., 2019). Investors can, therefore, use a casino's financial records to decide which firm to invest with and how much to invest. If a domestic firm loses 500k annually on its slot machines while making 100k in non-gaming revenue off the slot machines and the same firm makes 5 million annually on table games, while an international firm that offers only table games also makes 5 million annually, an investor could opt to invest with the international firm where the investment will not be exposed to potential losses from slot machines. Additionally, firms that provide their financial statements quickly (and have a reputation for accurate information, which falls under the reliabilityquality) will attract investors who are ready and able to invest.

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