Research Topics: Finance And Accounting For Managers (MBA Programme)

Finance and Accounting for Managers (MBA Programme)

Select one company from the Footsie 100 Index and using its most recent Annual Report as well as recent press reports on the company, answer following questions:   <li class="MsoNormal"> If you were trying to understand the company’s accounting policies in the areas of </li> a.       Fixed Assets and Depreciation; b.      Debtors and Provision for Doubtful Debts; and c.       Stock and Cost of Sales       Would you find that information in the Annual Report?   <li class="MsoNormal"> According to the press, what were the major issues/changes that the company has faced in the last 12 months (please provide evidence of press coverage in Appendixes)? Are they reflected in the company’s Annual Report? If so, where in the Annual Report are those issues reported and are they reported with the same or a different approach to the press? </li>     <li class="MsoNormal"> Identify three pieces of information relevant for each following stakeholder groups: </li> d.      Shareholders e.       Suppliers f.        Customers g.       Local community   Explain where in the Annual Report you would find those pieces of information, and relevant to that stakeholder group.   4.  Prepare an analysis of the performance of your chosen company. It is not necessary to attach the details of the Annual Report but the Internet address should be provided. If it is not possible to obtain the share price on the day on which the financial statements were prepared, use the most recent share price that you can find. (This information is needed to calculate the Price Earnings ratio).   Note: It is important that you should discuss the possible causes and effects of any changes in the ratios and it would not be appropriate to only repeat the ratios. The purpose of calculating the ratio figures is to gain an insight into the performance and financial position of the company over the period.     Credit:ivythesis.typepad.com

Finance and Accounting for Managers (MBA Programme)

Select one company from the Footsie 100 Index and using its most recent Annual Report as well as recent press reports on the comp...

The main purpose of accounting is to give information that is needed in the process of economic decision-making

“The harmonisation and standardisation of financial accounting benefits shareholders and other stakeholders. In contrast, these groups benefit from the variability associated with management accounting.”   Introduction               The main purpose of accounting is to give information that is needed in the process of economic decision-making that will help to create sound and feasible decision. It focuses on the process of preparing different financial reports that will show the information regarding the performance of the company or organization to the external parties or stakeholders that are involved with the company or organization such as investors, creditors, tax authorities etc. On the other hand, the management accounting focuses on the different issues that are related and important to the overall internal process of decision making ( 2007). Furthermore, the two is also different in terms of the influence of the impact of the standard setting bodies in the decision-making process or regarding their creation of laws and regulations. The financial accounting is being affected greatly by the different organizations and authorities in different countries, while the management accounting varies from different perspective of different organizations and companies.               Accounting is considered as the mirror of a society, thus it is a naturally occurring contingent ( 2001). The accounting process of different companies and organization in the world is considered as one of the most important factors, due to the fact that it enables them to see as well as control the financial flow inside and outside of their business or organization. Furthermore, it is also important to the different stakeholders of that organization, in order for them to know the current financial situation of the entire establishments. Because of the different factors such as technology and globalization, the process of accounting is facing different dilemmas and changes. Due to the said factors, internationalization of accounting standards is considered as a significant and essential part of the rapidly globalization economy ( 1992,). On the other hand, the management accounting is not affected or influenced by any general laws due to the differences in different small but important aspects of different companies.   Harmonization and Standardization of Financial Accounting   Accounting systems are all embedded in the economic as well as legal framework of a given country that is shaped by different political processes. Organizations have sets of implicit or explicit contracts among different individuals or group of individuals or stakeholders such as managers, investors, creditors, employees, auditors as well as the governments. All of the said stakeholders have their different preferences and endowments of capital, skills as well as information that will cause conflict of interests, as well as the contracting and monitoring problems ( 2004).    Each country has its own accounting regulation, thus the financial statements as well as reports are being prepared for their shareholders and other uses are based on the different principles as well as rules that can vary widely from country to country. That is the reason why multinational entities have to prepare reports about their activities and performance based on the different principles that makes it difficult for the investors and analysts to interpret financial information. The said lack of compatibility in the financial reporting can affect the credibility of the reporting of the entity and the report of the analysts that can have a great impact on the financial investments ( 2007).               Furthermore, the harmonization of the world economy can help the economy of the world by facilitating the international transactions, thus helping to minimize the exchange cost by the process of providing the increasingly perfect information. Above all, it can help to make the financial-based management decisions with less risk (1992, ).               By harmonizing the accounting policy, it will help to provide and give a level playing field in global manner. Thus, the regulators and auditors will receive the same information that will help to facilitate the overall evaluation process (1992).               Another important driving force for the global accounting system is the need to underwriter the securities in different capital markets by using a single set of financial statement. Thus, the capital market has a strong impact over the different accounting processes ( 1999).   Variability of Management Accounting   Management accounting is considered as one of the areas in the field and profession of the accountancy. It focuses on the different consideration regarding the ways in which the accounting information can be accumulated, synthesized, analyzed, as well as presented with the relation to the specific problems, decision, as well as day-to-day tasks of business management ( 1992). The managerial accounting focuses on the process of planning that has a great impact to the total financial performance of a given organization. Furthermore, it must go beyond the cost accounting and then integrate it to the various materials from the different fields and aspects of the organization such as the organization theory, behavioral sciences, information theory etc, in the multidisciplinary approach that aimed at the process of facilitating the production of different information for the internal decision-making ( 1992). Furthermore, it shows that management accounting focuses on the internal affair of the entire organization and include the process of decision-making regarding the inside issues of the company. Furthermore, all of those internal issues have a great impact to the result of the planning and implementation of different actions that can affect the organization or company as a whole, thus will affect all the entities that are directly and indirectly connected with them.   There are different activities that are involved in the management accounting which focuses on the process of planning in strategic and operational levels. It focuses on the establishments of different policies as well as the formulation or creation of plans that are related with the budget that are expressed in the financial terms. Furthermore, it is also considered as the initiation of the as well a provision of the guidance for the decision of management that involves the process of generation, analysis, presentation as well as interpretation of appropriate information. Because of the said process, management accounting can help in the process of monitoring as well as controlling the performance of the company by the help of the provision reports regarding the organizational performance, such as the comparisons of the actual situation with the planned or budgeted performance, together with the analysis and interpretation of the report.   Above all, management accounting has a great influence of impact over the financial accounting o the periodic reporting of the accounting that required by the statue in order to show the performance of the company to the stakeholders such as the shareholders, government agencies as well as other external parties that are related with the operations of the company   Financial Accounting vs. Management Accounting               It had been showed and explained in the first part of the paper that financial accounting and management accounting has a great difference in terms of its application and use as well as the use and implementers (Riahi-Belkaoui 1992, p. 2).               Financial accounting focuses on the reporting information that focuses on the financial position, performance as well as conduct of a company for a given period of time in order to the set of users as well as the market in general. On the other hand, the management accounting is considered as more oriented towards the different internal managers. However, both are considered as production processes of different accounting data for the different aspects of the problem-solving situations ( 1992).               The financial accounting is considered as the result of the process of applying the accepted standards and principles of accounting in the aspects of recording of the different transactions between the different entities. Therefore, the financial accounting statements conform obey the rules that had been established and implemented by the professionals. While, the management accounting reflects the use of different techniques that varies from the different disciplines such as accounting and internal problem solving (1992).                This shows that the techniques that are used differs from one company or organization to another and does not follow any set of rules and regulations, and the decision is left to the hands of the philosophies of the decision-makers ( 1992,).               In summary, it shows that the frame of the reference that is being used in the management accounting is much broader compare than that used in the financial accounting ( 1992). In addition, the information that are being used in the financial accounting is from the management accounting, that is why it is important to focus regarding the different details regarding the internal financial aspects of any company.   Stakeholder   Business is all about how the customers, suppliers, employees as well as financiers (stockholders, bondholders, and banks), communities, the media, managers and the government interact in order to create value (2007,). They are the one that can help the business to perform at its best or least.   Stakeholders are the different internal and external entities that are being affected by any decisions or changes that will happened in any aspects of the company. That is why many companies are analyzing the needs, demands and wants of their stakeholders regarding their decision-making process. Furthermore, they are also the primary concern of the company regarding the different rules, regulations and standards that are being used in order to come up with the expectations that will maintain good relationship and smooth flow of information and money inside and outside the company or organization.   Stakeholders and Financial Accounting               The harmonization as well as standardization of the financial accounting has a great positive impact towards the shareholders and other stakeholders. This is somewhat connected to the needs of the corporate governance. It focuses on the absence of the irreducible differences of the different interests between the investors and other stakeholders. The main objective of the corporate governance is to prevent the conflicts that will rise between the stakeholders because it can harm the growth and development of the company. Furthermore, it also focuses on the process of respecting the general interests as a whole by letting a fair and balance distribution of income that will help to persuade a corporate behaviour of all the stakeholders despite of the differences in their interests                         The financial accounting focuses on keeping transparency in a given company or organization. This shows the financial performance and condition of a company in a given period of time that will help them to communicate with their stakeholders. However, different stakeholders have their different interests towards the company, and that interests must be meet in order to maintain good stakeholder’s relationship. Furthermore, the process of harmonizing and standardization of the financial accounting can help the company to know the standard or the set rules regarding the process of reporting their entire performance from their employees up to the customers. Financial accounting enables the company to give information regarding their accountability in explaining the financial aspects of the company that will determine, reflects as well as strengthens and solidifies the powerful relationship between the company and the stakeholders. However, different stakeholders have different knowledge and skills regarding the process of understanding and analyzing the financial data and information that are being released by the company. That is why it is important and great help for the stakeholder to have a standard or general way or pattern in the financial accounting. By doing that, it will give them a guideline in knowing what to expect and what to look in the financial accounting aspects of the company.                         For instance, it will give the government and tax collector to know the current financial situation of the company that will enable them to collect tax that is appropriate with their revenue or profit gains in a given period of time. At the same time, it will also give the shareholders the idea regarding the overall financial performance of the company by knowing their fair share in the profit gain of the company. In terms of employees, they will be able to know if the company is worth working for, or if their compensation and benefits are equal to the financial situation of the company. In the part of the customers, it is their rights to know the situation of the company in order for them to know if the company is trustworthy or not. If there is no general set of rules and regulations that will cater to the financial accounting needs of each and every company, there are chances that they will not show or present the real data or information that are important for the stakeholders.   Stakeholders and Management Accounting               Management accounting is designed to facilitate the internal decision-making and accountability, thus provide necessary data in order to inform the management (2000). On the other hand the variability of the differences in the techniques that are used in the management accounting can benefit the stakeholders in different ways. First is that it helps the employees, primarily the managers to do their job by focusing and analyzing the internal information. Furthermore, another reason why management accounting is not regulated by any law or regulation is because there are different sensitive data and information that are not available in the external entities in the business. This will help other stakeholders such as the shareholders to maintain confidentialities of important internal data ( 2000).                         Furthermore, each and every company have their own techniques that are used in their internal control and monitoring procedures. This can help to ensure that the financial information is reliable and consistent when it is finalized and published to the public ( 2000).               In terms of the customers, because of suitable planning and implementation for the process of controlling and monitoring the financial aspects of the company, it enables the company to look at the future and present of the company, and this can be done by the process of estimating the cost, setting the price. This enables the customers to get what they paid for. Furthermore, it also enables proper budget and performance that will ensure quality control ( 2000).               On the other hand, it can also help the employees by letting them know the overall internal performance of the company that will help them to know what to improve regarding their activities and productivity ( 2000). This will also help them to analyze and figure out their strategies with regards to their individual performances with the overall performance of the company.             Conclusion               Based on all the theories and information that had been gathered from different perspective, ideas and resources, it can be said that accounting is considered as one of the most important aspects of any companies that focuses on the financial relationship of a given company to their stakeholders. Furthermore, the management and financial management are considered as two of the most important fields and areas of accounting. In addition, although the two are considered as inseparable because the other is dependent on the data and information to the other, the two shows huge differences in terms of use and focus. In brief, financial management focuses on the concerns of the external decision making as well as the external performance and issues of the company, while management accounting focuses on the most important aspects of the company which is the internal flow of finance and other monetary issues of the company that can greatly impact the entire operation and performance of the company, thus will reflect on the stakeholders’ relationship of the company.               It shows that while the financial accounting depends on the general standards of rules that are set by authorities in different countries. This is due to the fact that the financial accounting focuses on the needs of the external stakeholders to know the current situations of the company. In addition, the process of standardization as well as harmonization of the financial accounting is considered as beneficial and give advantage to the stakeholders, particularly to the shareholders, governments and interested customers. This is because; there is a set of standards that will give them the ideas regarding how to read or know the contents of the financial reports, and how it concerns them. The said general standards, rules and regulations serve as guidelines to the stakeholders in order to know the current situation of the company in terms of the financial matters. Furthermore, the harmonization and standardization of financial management enables corporate governance, by enabling the companies to become transparent regarding the real and current situation of the company.               On the other hand, the management accounting is considered as more important than the financial accounting because it focuses on the aspects that must be considered in the internal decision-making. This kind of accounting is not affected or influenced by any external authorities or standard giving bodies because it depends and varies according to all of the aspects of the company including their culture, behavior and other important aspects or department of the business. Furthermore, it also based on the principles and decision-making of the managers that will be based on his or her skills and perspective regarding the financial and accounting areas of the company. By using different techniques in the said type of accounting, it will give the company the edge in terms of decision making that will give the stakeholders, primarily the shareholders, more profits and returns.                             Credit:ivythesis.typepad.com

The main purpose of accounting is to give information that is needed in the process of economic decision-making

“The harmonisation and standardisation of financial accounting benefits shareholders and other stakeholders. In contrast, these groups be...

ACCOUNTING ETHICS CASES

The First Publication 1.      The first involves the various requirements of several institutions, one of which is the tenure offered by the university based on the number of publications, the second is the required number of pages for publication on a journal, and the final is the agreement made with the accounting firms on the study concerning the publication. 2.      The ethical issues involve the possible withdrawal from a commitment to the accounting firms and the tenure policies of the university. The major stockholders are the writer (me), the accounting firm, and the editor of the journals although not so much as the first two. 3.      These are the agreement that was made with the accounting firm which has extensively helped the writer with the study in exchange for a particular demand on the article publication. 4.      Alternatives are find another journal that will allow publication of five more pages and requesting for a change in the agreement with the accounting firm. 5.      The decisions that each corporation—including the writers’—are all greatly focused on the advantages that will be given to them, and the greatest norm is with the compliance with the agreement that involve both verbal or non-verbal. Regulations are also greatly met especially with the decisions of the company. 6.      A great consequence is the loss of points for tenure for the writer. 7.      I would ask around in other publications first while also contact the accounting firm for the possible change in the agreement.   The     Paper Co. 1.      The CEO and the shareholders of    Paper Co. for the need to ensure the operation of the company; there are also the workers within the company who live near the mill and are affected by the major changes in the company. 2.       The major issues involve the environmental safety of the mill and how they affect the people, as well as the amount of money it will take to ensure that the company will be able to comply with the needed changes in order to continue with their company. 3.      They should be ranked as one of the top although, with the question on environment and safety of the people, it should not be the highest because they are not the ones who are risking their lives, they are simply risking their money and their reputation. 4.      Environmental analyses of the effects of sonox to people especially as based on the climates, as well as the relation of the miscarriages, respiratory ailments, and other health problems by Riverside and for more safety. 5.      I would allow for more studies done on the environment and also for minimal changes or alternatives in providing safety to the workers and environmental concerns that will naturally affect everyone. 6.      They were more concerned with the length in which the company will have to close. Also the money that may be spent rather than the workers’ safety. 7.      might go to the media or file a suit against the company for negligence of the workers’ safety, and thus effectively ruining the company’s reputation and thus affect the working environment, performance, and reputation. Which Responsibilities Take Precedence? 1.      ’s firm believes that they should lower the standards of the policies on the financial institutions on the debt securities to allow more investors, which’s clients believe should not in order to protect themselves. 2.      The stakeholders are the firm and their stance to allow investors to come in without fear of possible debt,    ’s clients who fear that this may ruin them, and himself as a leader of the organization and opposing the proposal in order to raise the standards of the firm yet is loyal to the firm. 3.       The principles are honor and loyalty to the firm, then to the clients, and the need to stand up for what they believe in while also weighing the advantages and disadvantages of both situations while also including the values. 4.      Each of the sides will be presented with each presenting both the advantages and the disadvantages. Also, lower the standards a bit so clients will feel not be threatened, while accepting suggestions from the clients on the conditions. 5.      They have different perspectives and various things to protect.   believes in the cause, the firm believes that they will be helping the investors, while the clients believe they are protecting their own workers and therefore have different ideas and purposes. 6.      Problems can arise where clients will express distaste and change auditors without considering the auditors’ side. 7.      Present my case to the firm if I do not believe in it. If I do not believe in it, then I do not, and thus will be explained according to the advantages and disadvantages. I am loyal to them, to the point of being honest. Credit:ivythesis.typepad.com

ACCOUNTING ETHICS CASES

The First Publication 1. The first involves the various requirements of several institutions, one of which is the tenure offered by...

FINANCE AND ACCOUNTING FOR MANAGERS (MBA PROGRAMME)

The current ratio of the firm had dropped to the same all-time low level in 2001.  This can be explained as the current liabilities had exceed the past year level by at least 100% that makes the increase in current assets futile.  In effect, the firm had to intensify its gearing dependence (see figure) to mitigate short-term financial weakness (1999 p. 229) as a result of current liabilities exceeding current asset double of the latter.  On the other hand, the cause of seemingly undesirable level of current ratio could be a positive situation to the firm like efficient conversion cycle of current assets through just-in-time in operations (p. 310).                         The liquidity ratio dropped from the all-time highest recorded last year at 0.42 to 0.17.  The high level of current liabilities resulted high gearing ratio and suggested that the firm must rely to the banks to finance short-term debts.  To do this, the firm must operate under minimum level of liquidity ratio to secure loan agreement (p. 777).  In effect, even though it has relative disadvantage of slow asset conversion, it is protected by banks to offset liquidity shortages.                    Due to the firm reaction to current and liquidity ratios, its solvency is in relative stable level, although the figure shows all-time-high.  Technically, it is solvent because it is backed-up by banks and other creditors.  Thus, when a creditor claims the amount due at a specific period (1996), the firm can settle such debts on time.  In effect, its debtor reputation is saved simply by structuring its financial resources that is, looking bad in the eyes of banks but fair performer in the eyes of collecting creditors.             The asset cover is the reflection of the aforementioned analysis and verifies the firm’s reliance to banks and other third party creditors.  As suggested, this provides rationale for a high gearing ratio and indicative of the long-term solvency standing of the firm.  However, high reliance to debt financing as equity financing is insufficient connotes higher financial risk (p. 318).  This premise is explained by paying interest to outside creditors even though the firm is not earning.  The fixed commitment is a huge pressure to the cash flow necessary to execute operational objectives of the firm that subsequently supports the strategic ones.  As a result, risk of loss not only to dividends but total investment would be apparent.               In reference with the cash flow statement, it is showed that the effects of high gearing ratio does not yet took effect due to its long-run nature to solvency.  By using the information, the action of the firm to borrow outside funds was its strategy to finance the shortage of capital financing in its acquisition and disposal endeavors. As its assets could not support this feat due to minimal asset cover, it opted debt financing instead.  However, it is expected to perform well in the future in order for payment of interest would not be jeopardized and the estimated/ planned gains in acquisition/ disposal should be realized.               The all-time low shareholders liquidity ratio also supported the external borrowing.  Internal funds was spent to drastically increase resources like the almost 150% increase in labor force possibly to be deployed in the newly acquired businesses.  In effect, the remaining expenditures were directed from outside creditors.  Due to this, the firm conceded high financial risk in the future, and whether it performs good or bad, the interest and principal should paid out.  Since its internal financing entities are almost insolvent, the advent of bad performance will ultimately lead to bankruptcy filing or selling out its remaining assets.                  The intensified internal funding was also reflected in shareholders fund per employee ratio and asset per employee ratio that posted their all-time high.  The firm is really enthusiastic about financing a certain business prospect that it was willing to exhaust its internal funding and be submerged to risky outside financing to establish the dealing.  Working capital per employee, however, indicated the lessened liquidity of the firm due to drastic investment built-up.  Implications such as human resource training and motivation become critical to be able to obtain the optimal value from the acquired investments.  At all aspect of the business, it is seemingly surrounded of all types of risks from several stakeholders.  The financial figures could show how the firm drifted to this situation not delving to impose investment restrictions for smooth flow of corporate change.  It can catch a school of big fish but its unfamiliarity with the size of the sea installs the threat that it could be taken away by tidal waves.               To illustrate this possibility, the huge labor force expected to boost sales had only caused the firm to arrive at all-time low on profit per employee at the expense of all-time high average remuneration per employee.  This has dualistic approach.  It could suggest adjustment period for employees to learn the job or the ineffectiveness of acquired assets.  EBITDA and profit margin, as a result, was in all-time low that was possibly the effect of increased remuneration for additional employees.               The firm’s optimism of its future performance had yet to be realized as the bulk of new investments did not reflect in the return on shareholder’s funds, capital employed and total assets but even marked their all-time low.  Interest cover and debtor turnover (although collection is in all-time high is still insufficient) were also low indicating the inability of internal resources to pay debts.  However, it remained conservative when it comes to ownership as stock turnover maintained its stability.  In this hard situation, the aid of outside creditors (most probably banks) was of great use to maintain creditor payment level despite of poor operational performance.  The fixed assets turnover also showed that the firm invested in new buildings and land that were not yet able to realize its contribution.                With this forgoing, the firm and its owners have really an optimistic stance for the firm’s future.  The high risk of debt financing, however, entails realizing this positive prospects and efficiently manage the still “sleeping” resources.  There is also a call for human resource motivation from the management as additional workforce requires mentoring and training for effectiveness.                    Bibliography   Credit:ivythesis.typepad.com

FINANCE AND ACCOUNTING FOR MANAGERS (MBA PROGRAMME)

The current ratio of the firm had dropped to the same all-time low level in 2001. This can be explained as the current liabi...

FINANCIAL STATEMENTS – ACCOUNTING CONCEPTS

Financial Statements                 This paper is all about financial statements. An introduction to financial statements is presented to give a background to the reader. In the introductory part, the fundamental accounting concepts used in the preparation of financial statements are included together with the explanation of their basis. Examples are also given as an illustration of its application. This consist the first part. On the other hand, the second part is about the evaluation of the role of financial accounting in aiding the decision-making processes of the four different non-management stakeholder groups. An explanation of the nature of these decisions is also included. The paper ends with the issue on the conflicts arising from the diverse interest of the said entities to the financial statements.   Introduction to Financial Statements             One of the steps included in the accounting cycle is the preparation of the principal financial statements. They are the Income Statement and the Balance Sheet. These financial statements are a means by which the information accumulated and processed in financial accounting is periodically communicated to the users. Once the worksheet is completed, it is easy to prepare the financial statements as the necessary data have already been summarized. A third financial statement, which is the Statement of Cash Flows, provides    information about cash receipts and cash payments into operating, investing, and financing activities.             A Balance Sheet is a formal statement that shows the financial condition of the business as of a given date. It reports the resources of the business (assets), its obligations (liabilities), and the residual ownership (capital or owner’s equity). The Income statement, on the other hand, shows the results of the operations during a given time period. It summarizes business activities for a given period and reports the net income or loss resulting from operations. It contains the nominal accounts or the revenue and expense accounts. Fundamental Accounting Concepts             All financial statements should be created, preserved and presented according to the concepts and conventions that follow. Accounting concepts and conventions are the rules and guidelines by which the accountant lives. There are four general accounting concepts, although for some there are even more as each concept is interrelated with the other concepts. The four basic concepts are the going concern concept, accruals or matching concept, consistency concept, and the prudence concept.             The going concern concept is the underlying assumption that any accountant makes in preparing the set of accounts. It means that the business under consideration will remain in existence for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations. However, if such intention or need exists, a different basis is needed in the preparation of the said statements, therefore disclosing the former basis used.             Second is the accrual concept, or otherwise known as the matching principle. The purpose of this concept is to be sure that all revenues and costs are recorded exactly on the time they happened, on the financial statements of the period to which they relate. Thus, when a profit statement is compiled, the cost of goods sold related to those sales should be recorded accurately and completely in that statement. Costs pertaining to a future period must be carried forward as an advance payment for that period and should not be charged in the current profit statement. For example, payments made in advance such as prepaid rent would be treated this way. Expenses paid in arrears (paid after the period to which they relate) must also appear in the current period’s profit statement. This is done with an accruals adjustment. Through this concept, users of the said statement are not only informed of the past transactions involving the payment and receipt of cash, but also of obligations to pay cash in the future and of resources that represent cash to be received in the future. Hence, they provide the type of information about past transactions and other events that is important in the decision-making process of its users.             Due to the variability of methods employed in the treatment of certain items within the accounting records from time to time, the application of the consistency concept arises. For example, due to the fact that no single rate of depreciation is applicable to all fixed assets, every business has the full preference over its choice of a particular rate. However, he can also do necessary adjustments on it as he wishes, as long as he can explain the necessity of the said change as well as its effects, to be placed on the notes to the accounts being presented.                 The last concept is about prudence or otherwise known as conservatism. It is the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty. Its purpose is to avoid the instances of overstatement of assets or income and understatement of liabilities or expenses. Although the said practice does not allow the creation of hidden reserves or the exercise of provisions, the deliberate understatement of assets or income, nor the deliberate overstatement of liabilities or expenses. Otherwise, it lacks the quality of reliability due to the lack of neutrality of the financial statements. The preparers of financial statements need to assume the presence of inevitable uncertainties that surround many events and circumstances. Examples of which are the collectivity of doubtful receivables, the probable useful life of plant and equipment, as well as the number of warranty claims that may occur. Such uncertainties are recognized by the disclosure of their nature and extent, as well as through the exercise of prudence in the preparation of financial statements. Other Important Concepts             Another essential quality of the information provided in the financial statements is that it is readily understandable by users. For this purpose, it is assumed that the users already have a reasonable knowledge of business and economic activities, as well as of accounting. In addition, it is also assumed that the users are willing to study the information with reasonable diligence. However, information about complex matters should not be excluded merely because it is difficult for certain users to understand. This information may be relevant to the economic decision-making needs of the users that need to be included in the financial statements.              For the statement to be useful, the information contained here should be reliable. Information has the quality of reliability when it is free from material error and bias. It either can also be depended upon by users to represent faithfully that which it intends to represent or could reasonably be expected to represent. However, information may be relevant but lacks the quality of reliability, resulting to a misleading recognition. For example, if the validity and amount of a claim for damages under a legal action are uncertain, it may be improper for the enterprise to recognize the full amount of the claim in the balance sheet, although it may be right to disclose the amount together with the circumstances of the claim.                Information also needs to be relevant in order for them to be useful to its users. Information is said to be relevant when it influences the economic decisions of the users. This is through the assistance in the evaluation of either past, present or future events of confirming or correcting their past evaluations. Information about financial position and past performance is commonly used as the basis of predictions on future financial position and performance, as well as other matters within the direct interest of the user. It may include dividend wage payments, security price movements and the enterprise’s capacity to pay its liabilities as they fall due. To have predictive value, information need not be in the form of an explicit forecast. However, the ability to make predictions out of the financial statement is improved by the way the information on past transactions and events are being displayed. For example, the predictive value of the income statement is enhanced if there is the separate disclosure of unusual, abnormal and rare items of income or expense.               Users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance. In addition, they must also be able to compare the financial statements of different enterprises for them to evaluate their relative financial position, performance and change in financial position. Hence, the measurement and display of the financial effect of similar transactions and other events must be carried out in a consistent way throughout an enterprise, over time for that enterprise, and in a consistent way for different enterprises. An important implication of the qualitative characteristic of comparability is that users be informed of the accounting policies employed in the preparation of the financial statements, as well as any changes in those policies and the effects of such changes. Users need to be able to identify the differences between the accounting policies for similar transactions and other events used by the same enterprise from period to period and by different enterprises. Compliance with the Statements of Financial Accounting Standards, including the disclosure of the accounting policies used by the enterprise helps to achieve comparability. The Role of Financial Accounting in the Decision-Making Process of the Non-Management Stakeholder Groups             The four different non-management stakeholder groups interested in the financial statements of an enterprise are the institutional shareholders (investors or owners), the debt holders (also known as bondholders), the government, and the employees.             The shareholders/debt holders are among the major recipients of the financial statements of corporations. They range from individuals with relatively limited resources to large, well-endowed institutions such as insurance companies and mutual funds. The decision made by these parties includes shares to buy, retain, or sell, and the timing of the purchase or sale of those shares. Typically, their decisions have a focus either on investment or on stewardship, although in some cases, it is both. If the emphasis is on the choice of a portfolio of securities that is consistent with the preferences of the investor for risk, return, dividend yield, liquidity and so on, it is said to be investment focus. Otherwise, it is stewardship focus. The required information for this choice varies significantly.             Consider approaches that intend to detect the improper pricing of securities by a fundamental analysis approach compared to a technical analysis approach. The former approach examines firm, industry and economy related information, where financial statements play a major role. An important aspect is the prediction of the timing, amounts, and uncertainties of the firm’s future cash flows. In contrast, it is through the examination of the movement in security prices, security trading volume, and other related variables that the technical analysis is able to detect the improper pricing of securities. Typically, financial statement information is not examined in this approach.             When predicting the timing, amounts, and uncertainties of the firm’s future cash flows, the past record of management in relation to the resources under its control can be an important variable. The analysis undertaken for decisions by shareholders and investors can be done by those parties themselves or by intermediaries such as security analysts and investment advisors.             Employees, on the other hand, are motivated by numerous factors. They might have a vested interest in the continued profitability of their firm’s operations. Therefore, financial statements for them serve as an important source of information regarding the possible profitability and solvency of their company at present, as well as in the future. They may also need them in monitoring the viability of their pension plans.             The demand of the government or regulatory agencies can arise in a diverse set of areas. These include revenue raising (for income tax, sales tax, or value-added tax collection), government contracting (for reimbursing suppliers paid on a cost-plus basis or for monitoring whether the companies engaged in government business are earning excess profits), rate determination (deciding the allowable rate of return that an electric utility can earn), and regulatory intervention (determining whether to provide a government-backed loan agreement to a financially distressed firm.              However, due to the diverse interest of the said individuals to the information contained in the financial statements, conflicts may arise. For the shareholders/debt holders, the interest of these parties lies in the fact that the money invested in the firm is their own money. They would like to ensure that they are getting a good return on their investment. This is measured by looking at how much profit the firm is making and whether their investment is increasing in value. For shareholders in companies, this means they will get good dividends and the market value of their shares will increase. They can also make capital gains, in case these shares will be sold.             For the employees, they are part of the organization. As a part of the organization, they also feel that their efforts contributed to the profitability of the firm. They would therefore be delighted if they will be given incentives to their participation to the company’s achievement. They might prefer to be given bonuses, salary increases, and other form of monetary benefits. They might also prefer given stock options or promotions, depending on the discretion of both parties. However, for the firm’s part, it means increases in the expenses of the firm.             For the government, various ministries and departments have different interest in the firm’s ability to pay taxes. They also see and review the enactment of laws for the industry and the provision of social services to the public. The government may also want to ensure that the firm complies with laws on, for example, wage payments and employee benefits. These are for their benefit, as well as the benefit of the society as a whole.         References               Credit:ivythesis.typepad.com

FINANCIAL STATEMENTS – ACCOUNTING CONCEPTS

Financial Statements This paper is all about financial statements. An introduction to financial statements is presented...

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