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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.”
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...
To conclude there will always be talks and debates about whether or not the convergence of international Financial Reporting Standards and Generally Accepted Accounting Principles will happen. Throughout the world, IFRS is being used except in the U.S. In the U.S., GAAP is a more common method of accounting. In this paper, I analyzed which form of accounting is preferable, from principle based (IFRS) vs. rules based (GAAP). My research conducted on the similarities and differences in the accounting field, between the two.
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.
Accounting is the measurement procedure and communication of financial information (Needles and Powers 2013) that allows companies to report on the economic performance of their business. It is these reports which bring the concept of ‘true and fair’ into play. True and fair is a central concept related with the use of Financial Reporting Standards and the conceptual framework in keeping financial reports standardized and reliable for the users, namely shareholders and investors (Waqas 2013). Fair value accounting as viewed by a large percentage of specialists and academics has been considered a ‘revolutionary approach’ to support shareholders throughout the decision making process as it represents the current market value of an economic asset or liability (Kaya 2013). Although some have applauded the power of true and fair value, contenders have highlighted the substantial absence of consistency, thus valuing historical cost as a complete structure built of solid foundations.
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.
Managers, firm owners, and investors keep track of their firm performance. Financial statements are used to keep track of the strengths and weaknesses of firms. The three major financial statements used are income statements, balance sheets, and statement of cash flows. Financial ratios are also used to measure where a company stands within itself and in its industry norms. This analysis is called Financial Statement Analysis. Financial Statement Analysis gives understanding to a firm’s financial position at a given point of time and predictions for the future.
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.
The first conceptual framework for financial reporting was developed in the 1970s by the Financial Accounting Standards Board (FASB) in the US. The conceptual framework is a series of Statements of Financial Accounting Concepts (SFACs), taken as a whole, set the objectives, characteristics and other concepts that determine how financial information is measured and displayed in financial statements. In financial reporting, a conceptual framework is a theory of accounting prepared by a standard-setting body against which practical problems can be tested objectively. A conceptual framework deals with fundamental financial reporting issues. Accordingly, the International Accounting Standards Board (IASB) developed
Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently."
According to the conceptual framework for the preparation and presentation of the financial statements, “recognition is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the criteria for recognition”, while the “measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement” (NTU, 2011). In other words, during the process of recognition, any item must belong on the financial statements and should have probable future economic benefits flow to or from the enterprise and can be reliable and relevantly measured at the cost or value. So in order to prepare good financial statements, proper recognition and reliable measurement are necessary and important.
The level of accounting quality in terms of earnings management, timely loss recognition and more value relevance were better in firms that applied IAS. All this being presented in a very relevant manner clearly displaying compositions of the firms selected. Evidence showed that there was less earnings management in firms that applied IAS as the IAS left less room for manipulation to results to present desired financial picture of a firm, earnings were less smoothed and hence there was larger variances in earning reported specially with respect to earnings, cash flows and accruals and hence showing the actual picture to users of financial statements. (Lang, [2003]) Secondly, when evaluating value relevance is was concluded that as inherently high as well, the value for listed and regulated firms the relevance was high before and after adoption, hence no significant change. Lastly, with reference to timely loss recognition, again it was evidenced that all loses were timely reported and not allowed to be carried forwards or left to be recognized on the discretion of the management, as consistency in policies is expected to be applied once IASs are adopted. There were some evidence however, that suggested that in some firms belonging to particular industries, in some countries showed no significant variance in time loss recognition and
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.
A basic weakness in the current system of financial reporting is the possibility of different accounting treatments being applied to, essentially the same facts.
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.