Wait a second!
More handpicked essays just for you.
More handpicked essays just for you.
Chapter 3 Analysis of Financial Statements
Chapter 3 Analysis of Financial Statements
The need for international accounting standards
Don’t take our word for it - see why 10 million students trust us with their essay needs.
Recommended: Chapter 3 Analysis of Financial Statements
In this essay I am going to explain and identify external users of accounting information and give detail on the main characteristics and how these characteristics and the conceptual framework develop the benefits of financial statements for external users. Financial accounting includes information distributed to external users that are not part of the enterprise, e.g. stockholders, creditors, customers and suppliers, although the information is also of interest to the company's officers and managers. (Yahoo, 2007) External users have an interest in the businesses final accounts. They are individuals or groups from outside the business. (Cox, Fordon, 2008) They are also interested in the capability of a business to pay dividends. They may estimate the future cash flows using the past cash flow. The main external users consist of shareholders, creditors/suppliers, government, customers and lenders. (Elliot B and Elliot J, 2011, p.16) Shareholders are interested in dividends and profits. As they invest their own money in to the business they are really interested in how the business is running and how well it is doing. They are the owners of the business and they need to get information from those that manage the business on their behalf. They don’t have access to the same amount of detailed information as the managers do. The financial reports that are given to the shareholders are also used by other users such as lenders and trade creditors. These reports are regarded as general reports. (Elliot B and Elliot J, 2011, p.4) Creditors are interested in profits and net current assets. Anyone to whom money is owed to by the business is a creditor. They will look at how reliable the business they are supplying to is and see whethe... ... middle of paper ... ...023619AAR12UR> [Accessed 2nd November 2011] Tutor, 2011 Accounting information characteristics [Online]. Available from: [Accessed 2nd November 2011] Tutor, 2011 Accounting concepts and conventions [Online]. Available from: [Accessed 5th November 2011] Tutor, 2011 Key characteristics of accounting information [Online]. Avaialable from: [Accessed 6th November 2011] Journal (Electronic) Morina D. David W. (2010) Financial Reporting for Private Companies: The Canadian Experience [Online] Available from: Journal Accountancymagazaine.com (2002) Accountancy, p.142
The Securities and Exchange Commission requires that publicly owned businesses provide annual reports, which are available to the public. Many different people use annual reports, to make informed business decisions. Management from the company uses the information to determine a number of items. Some of these items are the profitability of the company, the inventory turnover rate, and the accounts receivables rate. Creditors use the annual report to determine how well a company can satisfy its current liabilities, as well as, how the company is doing in the aspect of long tem survival. Another group of people who use the annual reports furnished by companies are the investors, who can purchase shares of stock from the publicly company. Annual reports are very important to these people, because they are an over all picture to help them determine the over all stability and reliability of the company’s financial outlook. These annual reports are important because they do not only contain the financial statements of the company, but there is a management ‘s note to discuss reasons for any unexpected numbers, and an auditor’s report, from an independent accounting firm, who either agrees or disagrees with the financial numbers. Market reporter Matt Krant said, “Ignoring these reports is akin to driving down the freeway blindfolded.”
The annual report or 10-K of a company is a useful source of information for many agents outside of the corporation. Shareholder’s can view the contents of an annual report to get a more comprehensive idea of what the company is built upon. Additionally, annual reports show a company’s progress over the past financial periods and give a detailed breakdown of company investing and operations. The 10-K and all related documents are easily accessible on a company’s website for the public to view. i
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.
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). 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 whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
In conclusion, a company’s financial statements regarding its financial position are critical to all concerned. First and foremost, these financial statements provide critical tools for companies to make decisions to improve its share value in the global market of fierce competition. Secondly, they provide accountability to shareholders and stakeholders in the company providing better stability in its business practices and requirements regarding the Securities Exchange Commission (SEC) and General Accepted Accounting Principles (GAAP). Lastly, financial statements paint a picture that gives a measurable to the success of a dream once birthed long ago by an entrepreneur to get an idea to the marketplace with great expectations of striking it rich.
Prior to decide the audience, purpose, and natures of financial statement, it becomes necessary the definition of the words. Financial statements are reports that show where the money is, where it comes from, where it goes, and where is now. It can be divided in four categories: Balance Sheets, Income Statements, Cash Flow Statements, and Statements of Shareholder’s Equity. These reports will be finding in the Security and Exchange Commission (SEC) and as a public record, if the business is a public business. Private business will send those reports to owners and lenders of that business. The objective of Financial Statement is to give the audience information about a company’s performance and financial position. They need to be reliable, comparable, relevant, and understandable to the audience. The audience must be willing diligently to study the information provided in the statements.
Conducting business is all about making decisions. Firms need to decide whether to reinvest their profits or pay dividends. Lenders need to decide whether or not to loan money to a particular firm and what interest rate is appropriate to covers the risk associated with lending. Investors need to determine which stocks will provide the greatest return for the least amount of risk. For all the decisions listed thus far (and many more that were not mentioned), interested parties use the financial statements of a firm to aid in making these decisions. In this paper, we 'll look at the three major components of financial statements - the income statement, the balance sheet, and the
Jones, Allen N. "Financial Statements: When Properly Read, They Share a Wealth of Information." Memphis Business Journal. February 5, 1996.
Financial reporting provides financial information that is used internally to make important decisions regarding credit, cash flow prospects and investment strategies. Financial reporting is also used to communicate important financial information to those that are external to the entity.
Different users have different purposes when using audited financial statements (Millichamp and Taylor, 2012). IASSB chairman Arnold Schiller also argued that a quality and informative audit report is the one that delivers value to the entities’ stakeholders not just shareholders (2012). For example, the audited reports might give shareholders a picture of how profitable company is to see the potential growth and safety of their investment or lenders such as banks would be interested in the level of debt within a company and evidence that loans would be able to be repaid. Management is interested in analysing statements to measure the effectiveness of its policies and decisions, as well as government which would also be interested in determining the tax liability. Many people would prefer to use statements that have already been certified to make their decision due to the ass...
This paper is meant to give an informative view on how financial accounting is used to help small and large businesses make positive and safe financial decisions. It is designed to help small business owners without a vast knowledge or understanding of accounting or of financial reports achieves maximum growth. We will examine the importance of financial reports as well as being able to account for a company’s assets and spending. Through proper accounting and reporting companies have a better way of assimilating what areas can be improved by comparing the reports of prior years and evaluating the differences in what was done then and now. It helps to provide a guide as to what actions the company may want to take to in order to improve or hold its place in its industry.
Investors-Would examine financial statements to learn about a company's ability to continue paying dividends, or to generate earnings, or to continue growing .
Accounting gives companies, investors, regulators and others with a standardized way to explain the financial performance of an entity. Accounting standards present preparers of financial statements with a set of rules that they have to follow when preparing an entity’s accounts, making sure this standardization is across the market (Robert 2008). Many Companies are required to publish their financial statements in accordance with the relevant accounting standards. To simply International Financial Reporting Standards (IFRS) is one set of accounting standards, which have been established and maintained by the IASB with the purpose of those standards being efficient of being useful consistently. Financial statements are a structured representation of the financial positions and financial performance of an entity. The role of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions.
Anderson, R. 1981, “The Usefulness of Accounting and Other Information Disclosed in Corporate Annual Reports”;
The company publishes financial statements on a regular basis. These statements are considered external because they are for people outside the company. The main recipients are owners/shareholders, and some lenders. However, if a company's stock is publicly traded, its financial statements and other financial reports tend to be spread widely, and the information is likely to be others, such as competitors, customers, employees, labor organization, and the recipient such