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This assignment stresses the fact that it is impossible to satisfy the needs of different users with a single set of published accounts (finanacial statements). The assignment focuses on the fact that without accounting standards, the users of financial statements (published accounts) would have to learn the various accounting rules of different companies and comparisons between the different companies would be difficult.
The assignment further details the purpose and users of financial statements (ASB 1999 Statement of principles for Financial Reporting).It looks at how the statement of principles focuses the attention of both the regulatory authorities and the reporting entities.
"I would like to acknowledge and thank Mr S.Palan for his kind guidance and advice during the course of this assignment"
Focus on the usefulness of published financial statements/accounts has been at the centre of public debate for decades now. In 1975 the Corporate Report was published. This was the outcome from the Accounting Standards Steering Committee's wide ranging discussion paper and in part considered the usefulness of financial statements. The Report's conclusion as to the fundamental objective of published accounts included the following statement:
'The fundamental objective of corporate reports is to communicate economic measurements of and information about the resources and performance of the reporting entity useful to those having reasonable rights to such information' (Dunn 2002).
Financial Reporting(Financial Statements and Published accounts)
Financial statements are an integral and important part of the process of financial reporting.At the end of its financial year a company is required, under the companies act of 1985 to prepare income statement, a balance sheet, a cash flow statement in a prescribed manner.The Companies Acts of 1985 requires a considerable amount of disclosures to be made in the annual accounts.The most important provison of the companies act of 1985 is that every P/L account and evrery balance sheet will give a true and fair view of the state of the company. Financial statements do not include, reports by directors, statements issued by the chairman of the company, discussion and analysis by management and similar items that may be included in a financial or annual report published at the end of the accounting finanacial year.
The main objective of financial statements as given by Professor Dunn is "to provide information about the financial position, performance and financial adaptability of an enterprise, that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions"(Dunn 2002).
. Relevance and reliability are primary characteristics relating to content together with the threshold quality, materiality. The primary characteristics relating to presentation include comparability, clarity and understandability(Dyson 2004)
A.1- Regulation of Financial Reporting
There are many users of the published financial information. These users need to be assured that the information provided to them is true and is a fair view of the companys financial affairs.Hence a framework of regulation has evolved to control and guide the presentation and the content of the published information
The largest body of guidelines and principles is provided by a series of accounting standards which are issued by the International Accounting Standards Board(IASB).The standards are called International Financial Reporting Standards(IFRs) and International accounting Standards(IASs)
A.2- International Accounting Standards and The ASB
What contributed to the setting of various sets of financial reporting standards?The answer is differing traditions and price instability.With the increase in international commerce, and capital flow over the last few years there has been a great urge for an international accounting standard which is viable for every country.
Over the recent years the disparities of accounting practices among nations have declined markedly(Epstein nd Mirza 2004).Since the adoption of IAS(International Accounting Standards) by the European union has eliminated a lare fraction of the remaining variation leaving the US GAAP and IAS as the two 'big comprehensive' sets of standards(Epstein and Mirza 2004).
The Accounting Standards Board(ASB) Is a company limited by gurantee which imples that it does not issue shares and it is financed by the accountancy profession, the City of London through its stock exchange,the banks and various insurance communities(Dyson 2004).It was formed on the 1st of August 1990.The ASB is an autonomous body .It issues its own accounting standards which are referred to as FRCs(Financil Reporting Standards).There are four major committies under the ASB.They are namely,The Urgent Issue Task Force(UTIF),Committie on Accounting for SmallerEntities(CASE),Financial Sector and Other Special Industries Committie(FSOSIC) and the PSNC.
A.3-Statement Of Principles
The Statement Of Principles was first issued in the year 1999.It states the principles that are essential in presenting and preparing financial statements.It intends to provide a framework which clarifies the conceptual underpinning of standards and to allow standards to be developed on a consistent basis(Elliot and Elliot 2008).
Sir David tweedie, chairman of the ASB, commented, 'the board has developed its SOP in parallel with its development of accounting standards.....
The Statement specifies that the differing users of financial statements will not all require the financial statements to make the same decisions, but it is contended that the Statement of principles provides a framework for preparing financial statements that will be equally useful to them.
A.4-The Users Of Accounting Information
The IASC framework is used to identify the various user groups.Acoording to the Stament of Principles the Investor group is the primary user of the available accounting information.Investors are regarded as the defining class of user.
The Accounting Standards Board(1999) has identified seven major user groups;they are as follows-:
Investors-They are of two types,namely present and potential investors nd provide the company with the risk capital it requires. Investors are the shareholders of the company and naturally are the owners.They want to assess the stewardship of the management which implies that they want to safeguard the companys resources.The published accounts also are of use to the investors as they can make decisions about potential investment,i.e wether they want to buy the shares,sell them off or hold them. They also want to assess the ability of the business to pay them rich dividends.Hence shareholders can be defined as the main external user groups.
Lenders-The lenders are primarily concerned with the fact that does the company have the ability to repay the loans and interest at the end of the agreed loan period .On the basis of this information they decide wether to lend money to the company or not and on what terms and conditions.
Suppliers and Other Trade Creditors-They are identical in many ways to the lenders group.They look into aspects such as wether to sell to the business or not,will they be paid on time or not.they also look at the long term stability of the company.
Employees-They are an important user group.They need assurance about the long term stability and profitability of the company.They may also want to have a look at the accounts ot judge the ability of the business to provide remuneration, retirement benefits and employment opportunities.
Customers-The customers have a long term involvement with the company and with time they do need some assurance of the stability of the company they are dealing with. They are interested in the continued existence of the company.
Governments and Their Agencies-By having a look at the financial accounts of a company the government can decide how it needs to allocate its resources.It can regulate the activities of business.Determine taxation policies and carry out statistics. The government may also want to ensure that the firm complies with laws on wage payments and employee benefits.
The Public-Any business does not work in isolation and its success or any loss incurred by it has an indirect impact on the public.Financial statements may assist the public by providing information about the trends and recent developments made by the company affecting them in any way and the prosperity of the business.
The above researched information concludes that one cannot seriously claim that published accounts/financial statements fully meet and satisfy the needs of the various user groups identified.
Accounting is still a developing branch and still a lot has to be researched about the various user needs and ways in which these users can be satisfied. However financial reports reduce the uncertainity over the company's financial position and performance of the business.
There are arguments and convincing evidence that accounting information is a least perceived as being useful to users.Numerous studies that have asked users to rank the importance of accounting information,in relation to other sources of information,for decision making purposes.These studies have found that users rank accounting information more highly than other sources of information(Atrill and Mc Lacey 2002)
However it is impossible to measure just how useful published accounts are to the various user groups.I would like to end the question by firmly stating that "THAT IT IS IMPOSSIBLE TO SATISFY THE NEEDS OF DIFFERENT USERS WITH A SINGLE SET OF PUBLISHED ACCOUNTS".
The second question of the assignment deals with Cash flow statements and Income statements/Profit statement.The assignment focuses on the fact that Profit statements are of more importance than Cash flow statements and that Profit statements deal with accounting as a whole rather than only dealing with inflow/outflow of cash and "cash related items"
It further details the purposes of Profit statements and Cash flow statements,their advantages and disadvantages and also firmly specifies the superiority of profit statements over cash flow statements and discusses the disadvantages of cash flow statements.
At the end of a financial year a company is required to according to the compliance of the companies act of 1985, to prepare an Income Statement,a Balance Sheet,a Cash flow statement in a prescribed manner.These documents together are generally referred to as Financial statements of a company.
They are formal records of the varios financial activities carried out by a business entity,any person, or other entitie.Accordin to the United Kingdom Company law, financial statements are often referred to as accounts.
'Financial Statements' are summary reports that show how a firm has used the allocated funds entrusted to it by its stockholders (shareholders) and lenders, and what is its current financial position at the end of an accounting year.
There are four basic financial statements(Chopde and Bhatia 2007)]
Balance sheet: It is a quantitative summary of a company's financial outlook at a specific point of time,which includes assets liabilities and net woth.They include assets and liablilities of a company.They are also referred to as the statements of condition.
Income statement: Also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time.
Statement of cash flows: As per AS 3(accounting standards) they should report cash flows during the period classified by operating,Investing and Financing activities.
B.1- Profit Statements/Income Statements(P/L Accounts)
It is a financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurred its revenues and expenses - due to both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.It is also known as the "profit and loss statement" or "statement of revenue and
The income statement has evolved into the most well-known and widely used financial report on Wall Street(About.com 2009). The most important or primary objective of the profit statement is that to report a company's earnings to the investor group over a period of time.It shows how well a company is managing its expenses.They can be used to calculate financial ratios which help in analyzing the rate of return of the company.It also helps in comparing a company's profits to the other companies its competing with by examining various profit margins.
The major advantage that an income statement has is that it shows the profitability of the company over a period of time and not an exact point of time.On the basis of this the company can determine the major revenues it has earned through this income.Secondly, it is also significant as it is based on the principal of matching that implies that it shows the expenses a company incurs on earning its revenue.
The major disadvantage of the income statement is that it is considered as a fiction because it is based on the principle of accrual accounting, therefore it does not give the cash transactions. Cash is king and 'free cash' cannot be calculated through income statement.
B.2- Cash Flow Statements
Definition: A financial statement that reflects the inflow of revenue vs. the outflow of expenses resulting from operating, investing and financing activities during a specific time period(Entrepreneur.com 2009).
A cash flow statement or statement of cash flows is a financial statement that shows how changes in balance sheet and income accounts affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities (Bodie et al. 2004).
Cash Flow statement is prepared with an objective to high light the sources and uses of cash and cash equivalents for a period. Cash flow statement is classified under operating activities and financing activities. It shows the net increase or net decrease of cash and cash equivalents under each activity(Financemart.net 2007)
Activities That a Cash flow Statement Deals With
The Cash Flow statement namely deals with three kind of activities through which cash is realized-:
Operating activities-Operating activities are those activities which include the sale,production and delivery of the company's product as well as collection of payments from the customers. Examples, this could include purchasing raw materials, building inventory, advertising, and shipping the product.
Investing activities-These activities are referred to as those activities which deal with acquisition and disposal of long-term assets and other investments that are not considered tobe equivalent to cash.
Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. (Epstein and Mirza 2004).
The Cash flow statement although being a very useful tool of financial reporting, yet has its own limitations. Primarily as the name suggest it completely ignores 'non-cash' transactions. The cash flow Statement is 'historic' in nature. Most importantly the collection of data painfully takes a lot of time, hence it is not a practical approach. It does not show the liquidity position of the firm which is a very important data the users of accounts look for.
Cash Flow Statements show misleading 'inter-industry' and 'inter-firm' related comparisons as they do not measure the economic efficiency of the two industries nor do they look at the varying conditions and terms of purchases and sales of different firms.
The above researched information concludes that "Cash Flow Statements cannot substitute Profit Statements".The reasons for this are that Cash Flow Statements do not show the financial position of the term in totality.They only deal with the cash transactions and overlooks non- cash transactions which cannot give a clear idea of a firms standings.By firms standing we mean the assets owned by a company, the number of people it is liabe to pay,etc .The liquidity position of the firm cannot be realized. It is only viable for short term planning and not for long term planning as the entire data as a whole is not looked at,so making plans would be futile.
I wold like to end the question by firmly sating that CASHFLOW STATEMENTS CAN NOT BE PUBLISHED IN PLACE OF PROFIT STATEMENTS IN THE COMPANYS FINANCIAL REPORTS.