Useful Information

Alright. So now we're gonna have a bit of an abstract discussion on how information can be useful to the users. Alright, let's check it out. So for information to be useful to the users. Well, it's going to have to have two fundamental qualitative characteristics. We call them fundamental qualitative characteristics. And these two are relevance and faithful representation. Alright, let's start here with relevance, relevance. Is that the information is gonna make a difference in the user's decision making? Okay. So it's actually gonna be relevant to their decision. Right, relevance is gonna be relevant to them. So how is it relevant? Well, it's gonna have these two characteristics to be relevant. Okay, The first one is it's having predictive value. Okay, so what do you think predictive value is gonna do? What's gonna enable users to predict future outcomes. Right? So that's pretty relevant If it's information that can help them gauge what's gonna happen in the future. That seems pretty relevant, Right? So, they're predictive value and guess what confirmatory value is gonna do? Well, it's gonna help users confirm their previous predictions. Okay. So they might have made a prediction in the past. And now they're going to use this information to see if that prediction was true or not. Okay, so that's the relevance about faithful representation. Right, faithful representation. Well, this is that the information is true, right? The information has to be true and to go a little deeper. Let's talk about these three characteristics here. So faithful representation. We talk about completeness. Alright. Completeness means that the company is providing all relevant information right? They're not holding anything back there, showing everything that should be shown. They're showing it to the user's next is neutrality. Right? Well, neutrality, that means that the information is unbiased. Right? The company is not taking one side or the other. Are trying to pad things to make it look better. Right there. Unbiased. They're just showing you information and you do what you will with it. Last is freedom from material error. Alright. Material error notice we're not saying that they can be perfect. Material error means a big error. Okay. Means that there are no I'll say large errors in the information. Alright. We know no one's perfect. And if you think about a company like say coca cola or Apple or amazon that their billion dollar companies To say that, you know, if they lost a $5 bill here or there $100 is missing. It's probably not gonna be a huge impact on the users of the information, right? Because there's so much bigger numbers that they're dealing with. That these small errors they can slide by. Okay, So the freedom from material error. We talked about materiality and that's a threshold for how big an error can be. Okay. And that all depends on the size of the company. You can imagine a small company, maybe $100 missing could be a big deal but for a company like coca cola. You know, if that gets by they're gonna just not spend the time uh figuring out where that went. Okay, So let's pause here and then in the next video, we'll follow up with the conceptual framework. This is the way the faz be considers, uh, information to be useful. They use the conceptual framework to kind of put this all together. All right, so let's pause here and then continue in the next video.

Alright. So here in the center of the screen we have the fasb ease conceptual framework. Alright, so the faz be they're going to establish their accounting standards based on this conceptual framework. Right? So their objective up here, there's all these words provide financial information about the reporting entity data. They just want to provide useful information. Right? So that's the objective is to provide useful information. And we already discussed these first two, right? We talked about these fundamental quality characteristics. We discussed relevance and faithful representation. Alright, so now let's move on to the rest of this framework where we're gonna see the enhancing qualitative characteristics and then the cost constraints. And then through through these qualitative characteristics, they're going to create their standards based on what information they want to present to the users. Right? So let's check it out. Let's move on here to these four enhancing qualitative characteristics. Right? Enhancing qualitative characteristics. So let's discuss those right here. Okay, so the first one here comparability. Well, what do you think? Comparability? It's in the name right there. Information is comparable. We're able to take the information from one company and compare it to another company. Right? We want to come for it to be consistent. We want that comparability across company and we want it to be consistent with prior periods. Right? So if we want to compare, let's say coca cola and Pepsi we want to see their financials and we want to see, you know, we want to be able to take the information and make judgments based on the information. So we wanna be able to compare it but we also want to look at coca cola statements and be able to look at this year, last year the previous year and make decisions based on what's been happening over time. Right? So we need to be consistent over time and comparable across companies for it to be even more useful for users. Okay. About verifiability. So guess what information can be verified. Right? So notice all of these terms are just being defined by themselves. Right? Information can be verified and we're verifying it for the accuracy, completeness and reliability. And this is where auditors come in. Alright. So audit and this isn't just the I. R. S. The I. R. S. Isn't the only people who do audits. Right? Companies themselves hire auditors so that when they give the information to external users, the users feel more comfortable with the information because the auditor has come in and looked at it. Right? So verifiability, they want to make the information. This is basically where we have a paper trail. Right? The verifiability, this is the paper trail where we can make sure that everything you say happened actually did happen. Okay. So there's gonna be that paper trail for verifiability timeliness. Well information has to be available in time this time I didn't fill it in with timely. Right? Well information has to be available in time to make meaningful decisions. You can imagine that you need the information. So if we're gonna talk about what happened to Coca Cola in 2017, well, if they don't give us that information till 2020, well, that's not going to be so timely, right. It's not gonna be so useful to us because it's three years late. So that information has to be timely to be even more useful. And lastly understand ability. The language has to be transparent. Okay? So this just basically means that it's not when you read it, you're able to understand it, Right? It's not all convoluted. So it's trying to hide information from the users know. We want to be transparent. We want to tell the users what what they want to know or else why are we even providing this information? All right. So let's pause here and then let's move on in the next video.

Alright. So on top of that discussion of useful information and its qualitative characteristics. Well, we're also gonna have four assumptions in financial accounting that if we didn't assume these things to be true, It would just kind of be silly. Okay, so we have four underlying assumptions. Alright, let's start here with the first one. The monetary unit assumption. Well, the currency that we're using, whether it's the dollar, the euro, the bot, whatever the currency is, we have to expect it to stay stable. Okay, so we expect the unit to stay stable. We don't really consider inflation when we, when we make our financial accounting information, we just expect a stable monetary unit. The next is the economic entity and this is that the company can be separately identified from other companies or individuals. Right? So this is the separation of the owners from the business. This is like if you were gonna, you know, I don't know, buy buy a house, you can't just buy a house and say, hey, I'm gonna put this on the business. Don't worry, I'm gonna write it off. No, we have to separate the personal lives of the owners with the business or one business from the other business. We have to have this sharp boundary between what we're calling the business and what is everything else. All right, so that's the economic entity just like here in the example, right? The personal residence of Elon musk. It's not included in Tesla's accounting records, right? Tesla is completely separate from Elon musk in that sense. So let's go on here to the next one, the periodicity assumption. And this is that the economic life of the company can be split up into periods, right? These time periods of reporting. And this basically is for the timeliness effect, right? So we're just gonna artificially draw lines and it's usually gonna be at the year mark. Right? We're gonna break up the company's time into year. We're going to say, okay, what happened this year? What happened that year? And it doesn't have to be years, Right? We can break it up by month. We can break it up by week as long as we have these consistent times. It helps with the timeliness of reporting. And generally what we see is that we're going to see quarterly reporting every three months. There's gonna be some information given to investors and that helps with the timeliness there. And the last one here is the going concern assumption. So the assumption of going concern is that the business will operate indefinitely. Right. If we didn't assume that the company is just gonna stay in business, right. If the assumption is that the business is gonna, is gonna die or if it's just gonna, uh, run out of money soon, why are we doing all this information anyways? Right. So the going concern assumption just assumes that, hey, this business is gonna keep on going. Okay. So those are four assumptions. Let's pause here and we'll discuss one more thing in the next video

Alright guys, I know this discussion has been a bit abstract, but just stick with me. We're almost through it. We're gonna discuss the principles of financial accounting in this in this video. Okay. The principles of financial accounting and there are two measurement principles uh identified by gap, the first one being the historical cost principle and the fair value principle. So this is how we're gonna measure something. How do we measure what something is worth or either gonna use historical cost or fair value? Okay, so historical cost says that companies should record their assets at their cost, right? And assets, we haven't discussed assets yet, but we're gonna get into that. A little more assets are what you own assets of the business, That's what you own. So as an example, let's say, you purchase land for $50,000, right? So you're going to record that at $50,000, you're gonna have land Equal to $50,000. Okay? So when you show your accounting records, you're gonna say, Hey, I have land worth 50,000 now, let's say a year has passed. And the land increased in value to $60,000. Well, you're still holding onto that land, you're not gonna take that extra $10,000, you're not gonna mark it up to 60. Okay, so the historical cost principle says that you're gonna leave it at 50,000. Alright, so the land will stay at 50,000. And that can make sense, right? Because the value of the land can go up and down. So this keeps a stability, right? Historical cost aims at stability. Being able to just say, Hey, this land is at 50,000 when we sell the land or when we transfer the land. That's when we'll deal with the change in the value. But for now let's just keep it stable. It's 50,000. Okay, compare that to the fair value principle. Okay? So this this says that the company should report at their current market value. So that same example. Well, I guess now I change the example to say apple stock because this is how we would use it in in in real in real terms here. So in this example, we're gonna purchase $50,000 worth of apple stock. So we're gonna have apple stock Equal to $50,000, right? We're gonna have $50,000 worth of it. And when we show our financial information, we're gonna say, hey, we have 50,000 of apple stock. Right? But now let's say that after a year the value of apple stock went up to 60,000. Right? Same as in the land example. Well, in this case, when we're using the fair value principle, we're gonna show that apple stock on our books apple stock, we're gonna show it as 60,000. All right. Because that's the fair market value. Okay. And we're gonna see that different types of assets are going to follow the historical cost principle or fair value principle. And it can make sense that the, that the land would follow a historical cost principle. Because this might be something that you buy. You're gonna put a building on it. You're gonna use it for a long time, right? You're just gonna have it sitting there. So there's no reason to be marking up the land and say, hey, we're making money on this land. When you're just still gonna have it sitting there. Right? Compare that to a fair value principle for something like stock. Well, stock might just be a short term investment that the company is making and they want to know what that's going to be valued at, right? And it's very simple to find the value of apple stock. Right? You just go to google type in apple and you've got the stock price right there. Alright. So it's very easy to keep a fair value and you can see there's benefits to both of these historical cost has the benefit of stability, right? We're able to keep a stable price on this where the fair value principle gives us more relevant to this moment information. Right? So there's give and take in both situations. Alright, So those are measure measurement principles. Let's talk about the full disclosure principle. What full disclosure This kind of goes with completeness. Right. A company must disclose all events that would impact users information. So this goes with that completeness requirement. Right? Remember we talked about completeness of information uh when we were when we had faithful representation. Um So this full disclosure principle. It just requires that you disclose everything. And this might go past just numbers, right? We might have actual written words to tell the users. Hey, this is a little more information about this subject. Okay. Now, with the full disclosure principle, of course we can't tell them everything. Alright. Sometimes there's gonna be this cost constraint where some information might just be too costly to gather. All right. We have to weigh the benefits against the cost. Like how much is this gonna help the user's information first? How much is it going to cost us to to actually find out what this information is? Okay. So there's that cost constraint. If something is way too costly uh to to come up with that information, then it might not be worth it. Alright, so those are the principles there. Let's go ahead and move on to the next video.