Financial Accounting for Decision Makers

Activity 1.7
It is probably best that we regard accounting reports in the same way that we regard a 
report written in a foreign language. To understand either of these, we need to have had some 
preparation. When producing accounting reports, it is normally assumed that the user not 
only has a reasonable knowledge of business and accounting but is also prepared to invest 
some time in studying the reports. Nevertheless, the onus is clearly on accountants to provide 
information in a way that makes it as understandable as possible to non-accountants.
It is worth emphasising that the four additional qualities just discussed cannot make 
accounting information useful. They can only enhance the usefulness of information that is 
already relevant and faithfully represented.
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WEIGHING UP THE COSTS AND BENEFITS 
9
WEIGHING UP THE COSTS AND BENEFITS
Even when an item of accounting information may have all the qualities described, this does 
not automatically mean that it should be collected and reported to users. There is still one 
more hurdle to jump. Consider Activity 1.8.
Suppose an item of information is capable of being provided. It is relevant to a particular 
decision and can be faithfully represented. It is also comparable, verifiable and timely, 
and can be understood by the decision maker.
Can you think of the reason why, in practice, you might choose not to produce the 
information?
The reason is that you judge the cost of doing so to be greater than the potential benefit of 
having the information. This cost–benefit issue will limit the amount of accounting informa-
tion provided.
Activity 1.8
Figure 1.2 
Relationship between costs and the value of providing additional
accounting information
Value or
costs
(£)
Optimal
quantity
Quantity of information
Value
Costs
The benefits of accounting information eventually decline. The cost of providing information, 
however, will rise with each additional piece of information. The optimal level of information 
provision is where the gap between the value of the information and the cost of providing it is at 
its greatest.
In theory, a particular item of accounting information should only be produced if the costs 
of providing it are less than the benefits, or value, to be derived from its use. Figure 1.2 
shows the relationship between the costs and value of providing additional accounting 
information.
The figure shows how the value of information received by the decision maker eventually 
begins to decline. This is, perhaps, because additional information becomes less relevant, or 
because of the problems that a decision maker may have in processing the sheer quantity of 
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