Reliability of Financial statements



In company of annual report. In order to compete to disclose the conceptual framework, those need first analyze the importance of the company financial statement. Further to confirm the impact of elements financial statements with users. In addition, the analysis of financial statements use to understand the value of the four characteristics of information.

Part A

A company's financial statements is provided the vital information to the users appraisal company's financial performance (Devra Gartenstein, Demand Media). The elements of financial statements (included Assets, Liability, Equity) effect to provided the accurate data of company for users to appraisal.

Assets and Liability are future economic benefits disposed by past transactions result (Rutherford,Brian, 2000). In the financial statement, assets are recognised when the future economic benefits will be grown determine (AASB, 1995). When the future outflow of economic benefits, the financial statement of liabilities are recognised which will present obligation (AASB, 1995). Assets and liability had been measured reliably. Equity is the residual the assets deduction the liability (AASB, 1995).

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Measurement was monetary unit and scale in financial statement. Those included historical cost, current cost, net realisable value and present value to assess different financial statement elements.

Historical cost used the confirmed past records to support financial statement such as the users follow that building ages or hyperinflationary economies credibility increased. The users can analyze objective opinion to reduce risk of artificial modification such as false account and mistake transfer record. (Nur Barizah Abu Bakar and Julia Mohd. , 2007, P.21) Then, If historical cost had not been used , the users will difficult to predict the future value of assets.


Current Cost Accounting (Replacement Cost Accounting) which is a valuation method, focus on the enterprise variation in price of a particular assets.(Nur Barizah Abu Bakar and Julia Mohd. , 2007, P.21) The Current Cost Accounting could be provided the real operating profit to the variation, for the variation can adjust the assets of the produce input which is ongoing. Thus, the users compare operating income and expenses to determine the profits.

Net Realisable Value which is used the inventory to estimate the occur assets in the future and estimate the selling expenses, when the normal production process. In company, lower value had been chose by net realisable value since those avoid overrate of assessment with investors. Thus, the confirmed market value of inventory in financial statement should be showed.

Present value measure the future cash flow. The most of financial items (Current Liability, Assets etc...) used to calculate present value including net present value and spot rates. Those can help company to estimate investment finance in financial statement. Therefore, present value help company to compare benefit.


In Consolidated statement of profit or loss, although operating expenses slightly changed only, the main of fuel and aircraft maintenance expenditure did not rose. Since the company adjusted aircraft of flight, reduced volume of freight and disabled higher age of aircraft. Therefore, operating profit significantly increased from HK$1613m in 2012 to HK$3760m in 2013. It reflected that the company has improved by services and determine past forecast result. Also, aircraft equipment was the most influence for profit attributable to the owners of Cathay Pacific so earnings per share had been increased. finally, shareholders speculated trend of future company profit or earnings per share though dividends appreciation factor.

In capital, it showed that share capital was steady since any shares have not transaction in current year. Also, it reported that bonus shares and rights issue have not been provided. About reserves, it raised from HK$43,944m in 2012 to HK$51,152m in 2013 as main of cash flow hedge reserve has rose sharply in recent years. It reflect that the company's turnover have optimistic. Based on the above capital factors, shareholders can be used long-term of investment since company has enough reserves to gain for future. If shareholders want to short term speculation or day trading, it will earn less money. Therefore, shareholders understand long-term of investment to gain dividends.

In liabilities, the most of borrowings was exchange rate in United States dollars. Total borrowings were HK$67,052m in 2013.Also, the company must be fully repayable by 2025 since main of factor bought new aircraft to increase achievement. It testified that the company had to consider improving expenditure or policy. For example, company reduce freighter schedules and carried more cargo in the bellies of passenger aircraft. Although liabilities have been increased, statement of cash flows rose to HK$14,163m in 2013. It reflected that company was successful development to earn profit. Also, it can help to manage company solvency in future and identify short of cash early. Thus, shareholders understand company potential solvent and invest ability easily.

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Faithful representation

The main of business was carrying customers and goods by Cathay Pacific Airways Limited. These must be a lot of invoice. In order to make neutral position, it must find the most reliable of audit to disclose information. Thus, Cathay Pacific Airways Limited hired KPMG to make annual report. KPMG was Big Four for accounting. Auditors have been recognized in world. They provided industry knowledge and quality service. It included tax, information risk management and financial advisory services. Then, they need follow the Hong Kong Companies Ordinance to report by shareholder. Shareholders can make more information credibility to reduce record error. Thus, company must relate all revenue and expenditure to provide auditor. It included capital, liabilities and borrowing.

In annual report, auditor gave a true and fair view to provide qualified audit opinion for consolidated financial statements since company had case to affect amount only. It reported that accounts generally fair acceptable, it had not be too serious. shareholders did not feel suspicious. For example, invoice mistake, incorrect input and anything etc. These must not be occur. If financial statement did not be neutrality, it affected shareholder to decide policy. Thus, shareholders can follow financial statements to invest or understand company status.


In annual report, the most of amount and policy was compare between 2012 and 2013. It also compared the profit with other companies easily. And make the shareholders understand the company whether improve or worse policy. For example:

In non-current assets, it significantly increased from HK$118,574m in 2012 to HK$132,390m in 2013. In order to operate better company policy in 2013, the company invest more resource to increase efficiency. For example reduce expense, transportation lifecycle and receivable for sale of fixed assets. It reported that the company has aimed at improving the turnover and the introduction of new aircraft. On the other hands, intangible assets continuing increased to HK$9,802m in 2013. It showed that public confidence ability had been recognized by company. Then, Comparative with last year the services of Cathay Pacific has increased. Based on above analyze, shareholders can assess investment decision and compare revaluation of ability easily.

About investment, it included associates and other long-term receivable. Share of net assets were between listed and unlisted in Hong Kong. Then, Investments in associates slightly rose from HK$18,522m in 2012 to HK$20,314m in 2013. The principal of location was Hong Kong, China and other overseas island. If associates were loss profit, Cathay Pacific of investment had fallen. On the other hands, long-term receivable increase from HK$6,524m in 2012 to HK$7,135 in 2013 since derivative financial assets continuing increase from 2011 to 2013. In order to reduce any fair value change, derivative financial assets offset foreign exchange rates of fluctuations. When derivative financial assets offset successful, the value had been rose. According to reason, shareholders understand investment position. Also, shareholders analysis interest and fuel risk.

In profit the year, it went up to HK$2904m in 2013. it also was higher than around 2.7 times in previous period. In addition to forecasting earnings per share, shareholders can also compare the company of income and expenses. It included passenger services ,passenger services and staff salary. In annual report page26, shareholders also can watch the proportion among bar graph. it easily compared turnover from 2009 to 2013. Therefore, shareholders analyzed company improvement of policy.


Annual report was finishing categorize each item for users. Users were shareholders, customer, employee, supplies, government, public and lenders. In order to understand annual report by users easily, Cathay Pacific of annual report provided different method to disclose performance. The method included bar graph, contents and glossary.

In bar graph, Cathay Pacific of annual report offered to compare trend past few years. The bar graph used difference color represent difference year and items. If users didn't look words, users looked the bar graph to know turnover results instantly.

In contents, the annual report showed that the contents had difference large topic and page. When users followed the large topic, users can look small title to find information easily. Thus, users confirmed relevant information through the contents of large topic and small title.

In glossary and notes, the annual report abbreviated some professional terms. Abbreviation included available tonne kilometres (ATK), recoveries and borrowings. users can find to explain the terms in annual report. Also, users followed notes to find statement. For example dividend, fixed assets and deferred taxation.

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Part C

Relevance is the most important since difference users need difference financial information to make decisions. Users can find required information quickly. Also, economic decisions has been influenced by financial information. Those include predictive value, confirmatory value or both.

Predictive value help users to predicate future outcomes in annual report. Those can follow earning per share, assets and liabilities to understand the company future tend. When the company policy have been change, the users find turnover to analyze revaluation or devaluation. If the company turnover is revaluation, the users will find out main reason to consider the company margin of potential appreciation. Therefore, the users can predict the future dividends.

Confirmatory value provide previous evaluation to confirm financial information. The users follow that the last change of company policy make reference to verify whether annual report match with the facts. If the same fact is recurrence now or future, the users will confirm prior expectations. The users can understand future benefit change.

Both predictive value and confirmatory value, those are relationship. For example, total turnover has been changed at currently period. The users can use predictive value and confirmatory value to calculate the amount of business. These can double confirmation to predict future trends. Therefore, the users understand the direction of the company's future development.


In conceptual framework, four characteristics can make the company of annual report with an objective identification. This reflect to make an accurate and reduce record mistake. four characteristics also can show whether the company is going concern. If company has not conceptual framework, the annual report will reduce credibility. Thus, conceptual framework must been important for company.