Chapter 3Decision usefulness approach

Decision usefulness approach

providing relevant, timely and reliable financial information to help users make good decisions

understanding investors decision needs enables the accountant to prepare useful financial information

what are the two questions that arise with decision usefulness

who are the users of the financial statements

what are their decision problems

who are the primary constituency of financial statement of the conceptual framework

• potential equity investors

• lenders, and other creditors

what does the primary user group need information about

• amount

• timing

• uncertainty if the firm’s future cash flows

what characteristics does financial accounting information need if it is to be useful to the constituency

financial statements need to find the right balance between

• relevance (how useful the information is for making decisions)

• reliability (how accurate and trustworthy the information is).

helps users make decisions

why is information about the riskiness of securities useful to investors?

A risk-averse investor will only take on more risk if they can expect a higher return,

they will accept lower returns for safer investments.