The Objective of Financial Statements
What are fiscal statements? A fiscal statement is a papers produced annually which shows the net income or loss that has been made during that period of clip. These inside informations are presented in two statements. ( Thomas & A ; Ward 2009 )
The first statement, which is the income statement, provides inside informations on the net incomes or losingss made by the entity. For illustration, fiscal statements are able to demo a company ‘s fiscal place, runing consequences, and alterations in fiscal place from clip to clip. It helps investors and creditors look at past fiscal public presentations, predict hereafter public presentations, and guarantee sufficient hard currency flows for day-to-day operations through the study of the income and disbursals.
The 2nd statement, which is the statement of fiscal place ( balance sheet ) , provides information on the fiscal place of the entity. A balance sheet is frequently known as a “ snapshot of a company ‘s fiscal status ” . ( Williams et. al 2008 ) . A standard entity ‘s balance sheet has three parts: assets, liabilities and ownership equity.
Question 2: Users of Fiscal Statements
Fiscal statements are fundamentally prepared to supply utile information for economical determination devising. Specifically, the information from the fiscal statement is helpful in doing investings and recognition determinations. These informations are to supply information to specific users, such as investors, direction and loaners.
I ) Investors
Investors are known as person who provides capital to do a net income. Investors require information to assist them assess capableness of puting in a concern. Stockholders on the other manus, require information to enable them to measure the ability of the concern to pay dividends. ( Thomas & A ; Ward 2009 )
Investors look at the public presentation of the concern and its direction in footings of profitableness and sale figures. The intent is to see the effectivity of the concern in accomplishing its ends.
Investors besides look at the efficiency of the concern. This is to measure on how the concern is doing best usage of its resources and to see that it is bring forthing equal gross revenues from its investing and capital.
Investors require information to measure the stableness and exposure, including liquidness of the concern to see the long-run chances of the concern. The construction of the concern ‘ finance besides shows if there is a load to put on the concern ; whether there is adequate hard currency flow to pay its debts. Therefore, investors require information to see the future place of the concern whether or non it is bring forthing sufficient resources to refund its liabilities.
Investors besides look at the country of investing returns. The intent is to foretell future scenarios of the concern, including the returns that the investor or loaner expects to acquire out of the concern. For illustration, its capacity to pay dividends. Other than that, investors besides require these information to compare with similar investings in other entity ‘s.
two ) Management
One of the responsibilities required of direction is to fix fiscal statements that give an honest position of the company ‘s personal businesss and its fiscal place at the terminal of the period. This is to guarantee that they agree with the footings of the accounting criterions and statute law. For the concern to run swimmingly, directors of the administration need the fiscal studies to do concern determinations from past public presentations and to make up one’s mind their future projections. ( Thomas & A ; Ward 2009 ) For illustration, fiscal statements are used to explicate contractual footings between the company and other administrations to supply a clearer position of the fiscal place of the company.
three ) Lenders
Lenders are person who gives loans or recognition in concern affairs with the outlook that the money borrowed will be returned, with involvement, in a period of clip. Lenders require information from the entity ‘s fiscal statement to make up one’s mind if their loans and the involvement added to them, will be repaid when due.
Lenders normally want to cognize the place of hard currency flow of the concern ; this will find whether the company will be able to refund the one-year involvement and the loan taken when due.
Lenders besides want information about the stableness and exposure of the concern as this will proof the possibility of failure to pay the money that was borrowed by the company. Previous concern experience or past claims on the company ‘s assets are besides some of the information of import to the loaner ; as it proofs settlement of the company. ( Thomas & A ; Ward 2009 )
Question 3: Qualitative Features of Financial Information
Qualitative features are attributes that do the information in fiscal statements utile to the users. There are four chief features that are found in fiscal statements. ( Thomas & A ; Ward 2009 )
I ) Comprehensibility
Accounting information should be apprehensible to the users of the information. The information would be given to tilt towards less complexness, for users to cognize its significance. For the information to be apprehensible, information contained harmonizing to standard revelation formats must be crystalline ( clearly disclosed ) but without giving relevancy or dependability.
two ) Relevance
The information is relevant when it has the ability to do a difference in the determination devising of the users. The information should assist users make determinations about the allotment of resources, such as assisting them predict results of past and future events, or better their past rating. ( Thomas & A ; Ward 2009 )
three ) Dependability
Information given should be relevant to the users, as it affects their determination devising. Fiscal information should be dependable to the users ; intending that the information can be depended on without prejudice or unneeded mistakes, if non it will be useless or deceptive. The information is to be represented dependably on any dealing or event it claims to stand for. ( Johnson 2005 )
four ) Comparison
For information to be utile, the fiscal information given must be able to distinguish and measure the similarities between facets of the entity and other companies or industries. It must let comparings one clip and over clip across viing involvements. However, to compare, consistence is to be expected. ( Qualitative Features of Financial Information 2001 )
Question 4: Restrictions of Financial Statements
Although fiscal statements service the demands of the users and besides the qualitative features that fiscal information should hold, there are some jobs that are associated with the footings of the fiscal information, as if they achieve the aim of fiscal statements or non.
I ) Emphasis on Future
Planning is an of import portion for the direction ; hence necessitating a more future orientated fiscal information. On the contrary, fiscal statements chiefly provide sum-ups of past fiscal minutess ( historical cost accounting ) . These sum-ups may be utile in economic determination devising, but merely to a certain extend. The hereafter does non merely reflect of what has happened in the yesteryear. Although we may see net income & A ; loss, the info will non vouch future net income. Changes are ever taking topographic point in economic state of affairss, political, concern demands, and etc. Users are interested in what will go on instead than on sum-ups of what has already happened.
two ) Relevance of Datas
Fiscal accounting informations should be nonsubjective and demonstrable. By relevant, I mean suited for the job at manus. Fiscal statements deficiency of non-financial information. For illustration, it is hard to verify approximative gross revenues for “ Maxis Bhd ” , but this is precisely the type of information that is most utile to the users in their determination devising, as they need to repair the monetary value and measure of the merchandises they supply. Users need information about public presentation of the entity in order to measure its ability to supply wagess. The fiscal information should be flexible to supply any informations relevant for economical determination devising.
three ) Less Emphasis on Preciseness
Relevance is frequently more of import than preciseness to directors. A determination affecting 1000000s of dollars does non hold to be based on estimations that are precise down to the cents or even a dollar. Appraisals accurate to the nearest million dollars may be exact adequate to do a good determination. Since preciseness is dearly-won in footings of both clip and resources, fiscal accounting should put less accent on preciseness. In effect, they should concentrate on non-financial information, such as, information about client satisfaction. This besides will ensue in the image of the entity ; giving a bad or good image. ( Difference between fiscal and Managerial Accounting )
four ) Sections of an Organization
Fiscal accounting emphasizes on describing for the company as a whole. Fiscal accounting does include grosss and cost by major parts in external studies, nevertheless, information of each sector is non given. Therefore, I think that it should besides include more parts of the company. For illustration, merchandise lines, gross revenues divisions, or any other parts that the direction happen utile for determination devising.
V ) By and large Accepted Accounting Principles ( GAAP )
Fiscal statements prepared must be harmonizing with the by and large accepted accounting rules ( GAAP ) . Users must hold warrant that the studies have been prepared in conformity with a set of ordinances ; this is to demo comparison and aid cut down fraud and deceits. However information such as current market value is non included in fiscal statements therefore, ignored under the GAAP ; because the GAAP merely requires the historical cost. The current market value is critical information as it shows where the entity is standing ; which makes it of import to the users. ( Difference between fiscal and Managerial Accounting )