Decision Usefulness Approach

2877 Words12 Pages
| Decision Usefulness Approach | Can the decision usefulness approach make financial reporting more useful? | | | |

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Prepared by Jing Wang

Abstract

This paper explores the question whether the financial statements can be made more useful. This leads to an important concept in accounting-- the concept of decision usefulness. To properly understand this concept, this paper outlines other theories from economics and finance to assist in conceptualizing the meaning of useful financial statement information.
The main purpose of this paper is to introduce the concept of decision usefulness approach, related
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Therefore, in order to adopt the decision usefulness approach, three major questions must be addressed:

1. Who are the users of financial statements?

It is helpful to categorize users into broad groups, such as investors, creditors, managers, unions, standard setters, and governments, etc. These groups are called constituencies of accounting.

* Investors * Holders of equity securities, such as common stocks, preferred shares * Holders of partnership interest * Other equity holders or owners

* Creditors * Purchaser of debt instrument * Lend economic resources

* Manager * Inside financial statements provider and user * Has a different incentive of using financial statements than outsiders’

* Other users (provide resources) * Employees – provide human capital in exchange for salary, remuneration and pension. * Suppliers – extend credit to facilitate sales. * Customers – prepay for goods and services. * Union, standard setters and governments-provide policies and regulations.

In order to take a close look into various financial statement users’ behaviour, two theories or concepts should be outlined here:

* Single-person decision theory

Single-person decision theory takes the viewpoint of an individual who much make a decision under conditions of uncertainty. * It suggests how a rational individual makes optimal decisions in the presence of uncertainty. * It
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