2.12 Financial Reporting and its Qualities According to the Babylon dictionary (1997), financial reporting is the process of preparing and distributing financial information to users of such information in various forms. Emphasis is made that the most common format of formal financial reporting are financial statements, which are actually prepared in accordance with rigorously applied standards defined by professional accounting bodies developed according to the legal and professional framework of a specific locale. A financial statement also known as a financial report is a formal record of the financial activities of a business, person, or other entity, Babylon dictionary (1997). A financial statement also often referred to as an “account”; …show more content…
A guideline is to provide information that people, who are willing to understand it, can understand it: professionals or nonprofessionals. As a business owner, you have to think of the different accounting backgrounds of the different types of people who will be reading your reports and match that accordingly Marquez Comelab. Information can only be useful to end users if they are able to understand it. Relevant & Material: Relevance is the capacity of information to make a difference in a decision. It is important to report and disclose information that is relevant for anyone to make a decision. Accounting information must also deal with things that are significant enough to impact decisions that are made by those who use the financial reports (Marquez,2011). Since financial statements are for users to make economic decisions, the information must be relevant to the decisions that those users have to make. . Whether the information affects the economic decisions of users (materiality) and the nature of information affect relevance as well. Materiality is one of the assumptions used in financial reporting that contributes to relevance Derrell V. …show more content…
People must be able to depend on the figures and the facts printed on your financial statements and to make sure that they are true. It must be verifiable. Free from error. E.g. you can always look at a receipt to verify the amount of an expense. As you already know, when you get audited, you must verify all transactions that occurred in your business. Comparable & Consistent: Furthermore, comparability relates to the ability of information to be compared with those of other similar companies, without comparability the accounts would be of little use Frank and Alan (1999). General Accepted Accounting Principles (GAAP) allow for certain choices of different accounting methods for depreciation and inventory management. If a financial statement from one company that was prepared differently from other companies in the industry, or even prepared differently from previous statements, it is likely that the users will not be able to compare the statements among companies and over time. Comparability adds a degree of transparency to financial statements by allowing comparisons over time and among
The objective of financial reporting/statements is to provide information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for assessing the stewardship of the entity’s management and for making economic decisions.
Additionally, today’s society is filled with legal and ethical concerns that surround numerous individuals and their responsibility is to keep all information private and accurate. Furthermore, accounting and financial reporting is the most significant function of a business and entails a great sense of legal, ethical and technological concern.
Moreover, it has to contain any information that helps investors to make their decisions. • Accurate Records and Accounts We believe that business and financial records are necessary to our business operations. We depend on the integrity and accuracy of those records to make our decision and the benefit of investors. Also, the records it is important to report government agencies and others whom the company report to.
Ethics within any industry and organization is vital for its success. When those ethics have been compromised, it can be detrimental to the organization. Within the health care industry, it is vital they adhere to the ethical standards that have been established by the federal and state governments. For ethical standards to be followed, the health care executives are responsible to establishing policies and procedures. Understanding the financial aspects of the health care organization such as, where exactly does health care spending goes and how to reduce the inefficiencies and financial waste within the system is also important. This paper will address the financial reporting practices and ethics within
The Key Financial Statements of a Business The success of business is not based on how a company is able to effectively convert material and labor into goods and services. Although it is important to ascertain whether the customers are satisfied with the delivery of the merchandise, it is important that the company is able to keep up all of its financial statements. These statements tell the story of how a certain business operates (Biery, 2013). Meaning, financial statements will ascertain the performance of the company and its corresponding value, and how matters relating to the company's success should be managed.
The primary users of general purpose financial report supplier of resource, recipient of final product and services and reviewing of oversight function party. Suppliers of resources include both directly and indirectly suppliers who provide the resources. In this category which include stuffs of the company, lenders, creditors, suppliers, investors and contributors. They would like to know whether the company have achieved target or not, so they use the report to evaluate. In the sector of investor-owned the business, they have to know whether the company is making profit or not and how the cash flow they generated, since their decisions are identified by numbers, timing and uncertainties of expected cash flow.
Financial Accounting is ‘Asset valuation, accounting record completeness and accuracy, accounting estimates, reporting transparency, fair value accounting issues, convergence of accounting standards, evolution of accounting standards, audit efficiency and effectiveness’, as suggested by Accounting Dictionary (2014).
Financial accounting is the analysis, classification, and recording of financial transactions and reporting such information to respective users especially external users who use the information to make decisions about their engagements with the entity. In financial accounting general purpose financial statements are used for external reporting. The public by standards imposes the development of the statements through respective national professional bodies, International Accounting Standards Board and respective company Acts for various nations.
Private and public accounting has long been discussed and disputed in regards to financial reporting. Since the Financial Accounting Standards Board (FASB) was created in 1973, accountants have called for different accounting regulations for private and public accounting sectors, as private companies do not have the resources to meet the complex requirements of public companies. Private companies currently are not required by law to issue annual or quarterly financial statements (James, 2012). Private companies do, however, have the option to apply the U.S. Generally Accepted Accounting Principles (GAAP), cash basis, or accrual accounting to their financial statements (James, 2012).
The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine who the financials should be catered towards and what level of prudence is necessary for quality judgment.
The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ Profitability - This information comes from the Profit and Loss account. Were we can compare this year's profit with the previous years.
The globalization of business has resulted in the need for compatible accounting standards that can be used internationally for financial reporting. As a result, the International Financial Reporting Standards (IFRS) were developed by the International Accounting Standards Board (IASB) to unify the various financial reporting methods and create a single accounting standard which can be applied to any financial statement worldwide (Byatt). The global standardization of financial reporting will increase the readability and enhance comparability of globally traded companies’ financial statements, without the need of conversion or translation. There are a few main differences between the International Financial Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (U.S GAAP). The increasing recognition and acceptance of the International Financial Reporting Standards by accounting professionals in the United States, will affect the way in which the U.S will record financial statements in the future.
There are different understandings of financial reporting. In general terms, we can equate it to reporting of “external accounting”; which indicates an accounting that disseminates through internal business management to owner or broader stakeholder. From mainstream economist point of view, financial accounting can also be described as information that guides economic decisions. For information specifically in financial accounting, the approaching of perfect information is often taken as desired. More transparent information often leads to improved economic decisions. However, more transparent information means the more cost associated with providing the information.
(i) Judgement and materiality play a significant role in helping to ensure that the selection of accounting policies in presenting the financial statements for a true and fair picture of the company’s financials. This means that entities should provide the financial statements with comparability, consistency and clarity to users of these statements. Entities must follow accounting policies required by IFRS and AASB should be relevant to particular circumstance.
"The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions."[Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Reported income and expenses are directly related to an organization's financial performance.