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Ratio Analysis

Financial accounting is the preparation of financial statements that can be consumed by the public and the relevant stakeholders using either Historical Cost Accounting (HCA) or Constant Purchasing Power Accounting (CPPA). When producing financial statements, they must comply to the following:[

  • Relevance: Financial accounting which is decision-specific. It must be possible for accounting information to influence decisions. Unless this characteristic is present, there is no point in cluttering statements.
  • Materiality: information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
  • Reliability: accounting must be free from significant error or bias. It should be easily relied upon by managers. Often information that is highly relevant isn’t very reliable, and vice versa.
  • Understandability: accounting reports should be expressed as clearly as possible and should be understood by those to whom the information is relevant.
  • Comparability: financial reports from different periods should be comparable with one another in order to derive meaningful conclusions about the trends in an entity’s financial performance and position over time. Comparability can be ensured by applying the same accounting policies over time.