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Relevance

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Transcript

Okay, welcome back. And in this lecture we're gonna be talking about the relevance principle. within any organization, there are both internal and external stakeholders. And all of them have different information needs that they're after when it comes to the accounting records. So let's say for example, we had an investor. An investor is someone who wants to make a return on investment, they want to invest their funds and make certain capital returns as well as dividend payouts.

And so the information that they're after could be quite high level and quite specific to the needs. That'd be interested in the company returns the cash flow of the organization, as well as the equity holdings of other shareholders as well as other interested parties. If we then had a manager and managers could be someone who is in charge of a functional area and wants quite detailed, specific information. They may have certain targets that they have to achieve in order to hit their bonus or incentive and therefore could be quite focused on profit, or they could be focused on particular revenue line item, or they could even be focused on a certain balance sheet account. For example, you could have a warehouse manager whose sole job is to maintain a certain level of inventory. And therefore, the mix and the actual amount of inventory that they hold will be sitting on the balance sheet will be their job to manage.

The CEO however, kudos to be interested in much more high level information than a functional manager. And therefore they may be still requiring profitability and revenue targets, as well as balance sheet accounts as well because they're interested in the overall organization's performance as well as position as a CEO. They also have responsibility to report to all of the shareholders and all of the other relevant stakeholders within the organization. So therefore, they may have a multi faceted approach. into the type of information they after in order to report to this day folks, a customer may be interested in quite high level information, they may not be interested in in such specific information as the investor or the manager, they could be interested more in around how that their supplier is actually supplying them. And that it's well managed business.

They may not be as many as interested in the profitability of the company. But they may be interested in more in the product range and different decisions around the future of the company. Probably the main account on the balance sheet that the customer would be interested in is the actual inventory levels, and that the supply can actually supply this customer on time, and deliver the right kind of mix of products that they need in order to deliver for their needs. A lender or creditor may be interested in quite detailed information, because at the end of the day, the funding part of the business that may be interesting In Kennedy's organization, afford to pay the loan after we've left this organization. So the kind of things that they may be interested in are things like liquidity, they may be interested in interest cover, they may be interested in looking at all the different ratios of the organization and making sure that it's achieving all of the the right performance targets that are set in order to satisfy the banking facility that they have with this organization.

And so, when we look at the concept of relevance, it's important to understand that information needs to be presented to satisfy a number of different stakeholders, and therefore the format and the level of reliability will also vary from stakeholders stakeholder. In the next lecture, we're going to be talking about the compatibility principle.

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