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Accounting standards in the business world
Accounting standards in the business world
Accounting standards in the business world
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The essay below is going to be analysing and explaining the accounting principal of comparability which briefly means that is a “quality of accounting information that addresses the usability of financial information” (My Accounting Course 2015) and also the importance of investor confidence in the financial statements. Furthermore, there will be an illustration by explaining a particular situation where inconsistencies in accounting treatments can undermine comparability. The accounting principle ‘comparability’ is one of the main characteristics of financial statements (Dunn 2010) so; “in 1989 IASC launched a major initiative to bring greater comparability to financial statements (Roberts, Weetman, Gordon 2008)”. The initiative was represented …show more content…
One of the main characteristics of financial statements states that the user of financial statement can compare the financial statements of an entity with another organisation’s financial statements to analyse and evaluate their performance and financial position and to identify trends in an entity’s performance with reasonable convenience. Additionally, comparability is the quality of financial statement that enables any person to compare financial statement with other financial statements of the same organisation or financial statements of other organisations in a similar industry (Accounting-world.com 2015). Furthermore, “comparability requires that figures are …show more content…
In addition, the objective of the financial statement user is to find and interpret this data in order to have answers for questions regarding the organisation such as: Would an investment generate returns, or what is the degree of risk inherent in the investment (M. Fraser, Ormiston 1998). Additionally, an organisation’s financial conditions are the main concern to investors and creditors. Investors are simply the capital providers and they rely on an organisation’s financial conditions for both the safety and profitability of their investments. Moreover, investors must to know where their money was spent and where it is now. The financial statement of balance sheet reports that kind of issues by providing detailed information about an organisation’s asset investments. Furthermore, the balance sheet shows a business’s outstanding debt and equity components, and so debt and equity investors are able to better understand their relative positions in a company’s capital mix (Way
“The objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.”
Waqas A, 2013, ‘Analysis of Factors Present in Financial Reporting Standards Leading to Manipulate True & Fair View of an Entity’s Financial Statements’ Social Science Electronic Publishing 2014, KPMG p.1
Analyzing financial statements is an important part of decision making because valuation of profits and losses statements are the most important drivers in business. They are used to diagnose weak spots in the current strategy in an internal perspective and play a key role in making decisions to mitigate against such losses and helps in achieve it long term objective
IFRS are developed and published to promote the use of those IFRS in universal purpose financial statements and other financial reporting. General purpose financial statements are directed towards the common data needs of wide range of users. As it turns out, have different national accounting system is expensive for companies and investors. Companies need to keep a copy of the accounting system, and investors will be cautious about buying shares in the Corporation accounts they do not understand. This problem arises because accounting guidelines have developed over the centuries in which there are different needs from one another, the economy and the means of regulating.
One of the most debatable topics in the accounting industry today is the extent in which we should make the financial statements understandable to the general population. The FASB currently gears its reporting standards toward...
As we already know, financial statement is the most important aspect that every company should have as a reference for any decision making in term of loan, project, operation and other related matters. Because management of any business requires a flow of information to make informed, intelligent decisions affecting the success or failure of its operations. Investors need statements to analyze investment potential Banks require financial statements to decide whether or not to loan money, and many companies need statements to ascertain the risk involved in doing business with their customers and suppliers. Because of these reasons, it is essential to have comparability and consistency on financial statement for decision making process then lead company to perform well in their business and boost the profitability as well.
A company’s creditworthiness, accuracy of their tax returns, and profitability can be determined through an analysis of their financial statements. Financial statements are utilized to make long-term decisions by performing financial analysis to further understand their performance/disposition as well as to examine their financial health. Managers and investors review financial statements such as the income statement, the balance sheet, the cash statement, cash flow statement and the retained earnings statement. All four of these financial statements are inter-related and serve of great importance in making rational financial decisions by the managers of the company, investors, and creditors. Financial statements enable business leadership to analyze various investment opportunities/projects facing a company and to give department heads an understanding of how to meet the objectives.
In the scholarly article ‘International Accounting Standards and Accounting Quality’ written by Marye Barth, Stanford University, Wayne Landsman and Mark Lang, University of North Carolina, a series of comparisons have been made between the accounting quality of firms that adopt International Accounting Standards (IASs) and the firms that do not. The basic concept from where their research stems from is the implementation of higher quality of financial reporting standards issued by international accounting body namely, International Accounting Standards Board (IASB). The scholars in their research have in fact aimed to re-confirm the conclusions
Both relevance and reliability are two competing characteristics on the accounting information. In order to make financial information more reliable and a trade-off exists which lead to information less relevant and vice versa.
(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.
A basic weakness in the current system of financial reporting is the possibility of different accounting treatments being applied to, essentially the same facts.
Many corporations weather US or Global; big or small, public or private, have adopted different accounting practices which have consequences to business owners, investors stockholders, managers and corporations. Over recent years, many countries are gearing towards and trying to converge the two practices between International Financial Reporting Standards as one standard to allow simplified financial reporting and eliminating the need for conversion. The International Accounting Standards Boards (IASB) is trying to bridge the gap between these two accounting standards into one
Prospective Investors need Financial Statements to assess the viability of investing in a company. Investors may predict future dividends based on the profits disclosed in the Financial Statements. Furthermore, risks associated with the investment may be gauged from the Financial Statements. For instance, fluctuating profits indicate higher risk. Therefore, Financial Statements provide a basis for the investment decisions of potential investors.
NTU, 2011, Framework for the preparation and presentation of financial statements. [Online] Accessed on 21/10/2011, available at: https://now.ntu.ac.uk/d2l/lms/content/viewer/main_frame.d2l?ou=130510&tId=611855
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