How does faithful representation impact balance day adjustments (BDA)?

Faithful representation plays a crucial role in ensuring that the financial reports of a business accurately reflect its economic reality. This principle requires that the information presented in financial statements truly represents what it purports to show, meaning it should be complete, neutral, and free from error. When it comes to balance day adjustments (BDA), the goal is to ensure that all income and expenses are recognized in the correct accounting period, which is essential for accurately portraying the business’s financial position.

By adhering to faithful representation, BDAs ensure that all relevant information is included and properly adjusted so that stakeholders can rely on the financial statements to make informed decisions. This creates a clearer picture of the business's financial status, influencing assessments of performance and aiding in future planning. It promotes transparency and trust between the business and its stakeholders, thereby enhancing the reliability of the financial information provided.

In contrast, the other answer choices do not align with the fundamental purpose of faithful representation in the context of BDAs. For instance, reducing the need for financial reports would undermine the very purpose of financial reporting; allowing for manipulation contradicts the principle's intention to provide truthful and accurate representations; and limiting cash transactions has no direct link to how faithfully representing information impacts financial reporting.