What does the reliability principle require from financial statements?

• A. They must include management forecasts
• B. They must be accurate and free from bias
• C. They should reflect future projections
• D. They can be based on estimates

Answer: (B)

The reliability principle is a cornerstone of Generally Accepted Accounting Principles (GAAP) that emphasizes the need for financial statements to be trustworthy and dependable. When financial statements are said to be reliable, they must present information that is both accurate and devoid of bias. This ensures that users of the financial statements, such as investors, creditors, and other stakeholders, can make informed decisions based on the data provided.

Reliability implies that the information presented is verifiable and can be confirmed by external measures. Accurate reporting helps maintain the integrity of financial information, thus enhancing the credibility of the financial statements. This principle helps to foster trust between the entity and its users, as it ensures that the information is reflective of the actual financial position and performance of the organization without any manipulation or distortion.

In contrast, other options do not align with the primary focus of the reliability principle. Inclusion of management forecasts, reflection of future projections, or reliance on estimates are more associated with relevance and the preparation of forward-looking information rather than ensuring that the presented financial statements are reliable and accurate. Therefore, the essence of the reliability principle is best captured by the requirement that financial statements must be accurate and free from bias.