Compare and contrast the objectives of financial statements as outlined by the Companies Act and Conceptual Framework - Essay Example

Topic: Compare and contrast the objectives of financial ments as outlined by the Companies Act and Conceptual Framework. INTRODUCTIONThere has been confusion between the policies of the Companies Act(www.opsi.gove.uk) and the Conceptual Framework. Some fear that the mixture of both parts will result to use of too much wasted time preparing a complex income statement, balance sheet and statement of cash flows. The following paragraphs will finally put to rest the confusion between these two similar but different guides in the preparation of financial statements. BODY Compare the objectives of financial statements as outlined by the Companies Act and Conceptual Framework There are many similarities between the Companies Act and the Conceptual framework. Both the Companies Act and the Conceptual Framework enumerate the responsibilities of the board of directors to the general public. Both the Companies Act and the Conceptual Framework enumerate the responsibilities of the board of directors to the general public. Both the Companies Act and the Conceptual Framework enumerate the responsibilities of the board of directors to the general public. Second, Both the Companies Act and the Conceptual Framework(Meigs, 1992;p738-739) that enumerate the responsibilities of the board of directors to the general public makes it a MUST that the preparation of financial statements will foster a closer relationship between suppliers, customers and the other users of the financial statements. Next, Both the Companies Act and the Conceptual Framework that enumerate the responsibilities of the board of directors to the general public makes it a MUST that the preparation of financial statements to determine if the company has not violated any environmental laws of the land. Both the Companies Act and the Conceptual Framework(Kirkegaard, 1997;p77-91) state that the company must suffer the consequences of their decisions that violate the laws of the land. Furthermore, the focus of both the Companies Act and the conceptual framework is to use independent judgment in the preparation of financial statements. Both the Companies Act and the Conceptual Framework enumerate the responsibilities of the board of directors to the general public. The responsibilities include the recording of daily business transactions in the better interest of the users of the financial statements. And, these users include the board of directors themselves for the will place their reasons for the successful as well as unsuccessful operations of the company for the past year or years of operations. In the same light, the board of directors will indicate their plans and objectives for the next year or years of business operations in the financial statements and the accompanying notes to the financial statements. Evidently, both the Companies Act of 2006 and the Conceptual Framework enumerate the responsibilities of the board of directors to the general public. Second, Both the Companies Act and the Conceptual Framework that enumerate the responsibilities of the board of directors to the general public makes it a MUST that the preparation of financial statements will foster a closer relationship between suppliers, customers and the other users of the financial statements. The customers need the financial statements(Larson, 1995;p601-606) to determine whether they will continue to be customers in the near future because the income statement shows that the company has been generating income for the past year or years of operation or to look for other competing companies to buy their products from. Another user of the financial statement that should be looked into with care is the suppliers. The suppliers will use the financial statements to determine if they will continue to grant credit terms or increase the maximum limit of their credit purchases. Another user that will use the financial statements is the government tax agency. For this agency will use the income statement to determine if the company has been paying the correct amount of taxes. Lastly, another agency that has been managers of the company. For, the managers want to know if they have performed well in relation to the managing of resources of the company in order for them to justify the reasons for the salary increase proposals orchestrated by the managers in order to make themselves as well as the employee subordinates under them very happy with the additional remuneration under time. Obviously, Both the Companies Act and the Conceptual Framework that enumerate the responsibilities of the board of directors to the general public makes it a MUST that the preparation of financial statements will foster a closer relationship between suppliers, customers and the other users of the financial statements. Next, Both the Companies Act and the Conceptual Framework(Hopwood, 2004;p58-62) that enumerate the responsibilities of the board of directors to the general public makes it a MUST that the preparation of financial statements has not violated any environmental laws of the land. These environmental laws include the prohibition of throwing the factory waste products to pollute the streams and rivers beside the factory sites. Also, companies must put their smoke stacks several feet above the roof tops so that the exhaust air will be so high that the people will not notice the polluted air coming from the factory site. Truly, Both the Companies Act and the Conceptual Framework that enumerate the responsibilities of the board of directors to the general public makes it a MUST that the preparation of financial statements has not violated any environmental laws of the land. Furthermore, the focus of both the Companies Act and the conceptual framework that the company must use independent judgment in the preparation of financial statements. Meaning, the company must not make it appear unintentionally or even intentionally that the financial statements are issued in order to favor the company. To clarify, the company will record all future sales currently in the books in order to show a better picture of an income generating business. Also, the company has been having losses for the past years of operation. Definitely, the focus of both the Companies Act and the conceptual framework that the company must use independent judgment in the preparation of financial statements. In addition, the focus of both the Companies Act and the conceptual framework that the company must use independent judgment in the preparation of financial statements. This means that the board of directors must not input personal expenses in the company books of accounts. For example, the officers must include the company money used to buy imported books that his or her child will use in school as part of the company entertainment expenses. Clearly, the focus of both the Companies Act and the conceptual framework that the company must use independent judgment in the preparation of financial statements. Contrast the objectives of financial statements as outlined by the Companies Act and Conceptual Framework. There are many differences between the Companies Act and the Conceptual Framework. First, the focus of the Companies Act is on corporate social responsibility whereas the focus the conceptual framework is the proper recording of assets and liabilities, revenues and expenses and conservatism. Conservatism has been misinterpreted as recording only future probable losses before they are real losses whereas the future probable gains are not recorded. And, the Companies Act eliminates the maximum working age. Furthermore, the Companies Act has the force of law with it whereas the Conceptual framework does not have the same force of law attached. Also, the company formation under the Corporations Act specifically mentions that processing the information to accommodate internet access is a must whereas the conceptual framework is silent on this. Further, the Companies Act states that the auditors will be allowed limited liability for claims when negligence occurs if approved by the company policies whereas, this is not allowed in the conceptual framework rules. Both the Companies Act and the Conceptual Framework state that the company must suffer the consequences of their officers’ decisions that violate the laws of the land. For example, the officers of the company must suffer if the huge capital outlay for products new product and the demand for such products is nil because there had been no feasibility studies done. Also, the officers or preparers of the financial statements must see to it that the prices of their commodities are not too high so that the in order to compete with the low priced products offered by the company’s competitors. Surely, Both the Companies Act and the Conceptual Framework state that the company must suffer the consequences of their officers’ decisions that violate the laws of the land. And, the Companies Act eliminates the maximum working age. The new act removes the mandatory working age from seventy years to new minimum working age of sixteen years whereas the Conceptual framework does not include this in their policies. The main reason is that many people could still work after the age of the seventy especially the think tanks or the chief officers of the company which the new recruits have to learn by encounter actual work experiences each day. Furthermore, the Companies Act has the force of law with it whereas the Conceptual framework does not have the same force of law attached. Thus, the companies found violating the proper recording of assets, liabilities, capital, revenues and expenses can be prosecuted and penalized whereas a violation of the conceptual framework cannot result to the prosecution. What the conceptual framework can do is command the external auditors, through its generally accepted accounting principles theory, to issue an adverse opinion or no opinion at all in case of material violations of the conceptual framework policies. Glaringly, the Companies Act eliminates the maximum working age. Further, the Companies Act states that the auditors will be allowed limited liability for claims when negligence occurs if approved by the company policies whereas, this is not allowed in the conceptual framework rules. For, the conceptual framework clearly states that any violation of generally accepted accounting principles must be meted with an unqualified opinion or an adverse opinion regardless if there is the approval of the board of directors. Also, the company formation under the Corporations Act specifically mentions that processing the information to accommodate internet access is a must whereas the conceptual framework is silent on this. For, the current borderless society can produce a business transaction where the buyer from Mexico can buy a Benetton product from London with just the click of the mouse on the merchandise store website. Naturally, the Companies Act states that the auditors will be allowed limited liability for claims when negligence occurs if approved by the company policies whereas, this is not allowed in the conceptual framework rules. Discuss why they were developed The Companies Act was formed because businesses enter into contracts. These contracts include the agency and principal contract. Also, the many people have submitted their sales transactions questions to the courts for decision making. The conceptual framework is made by the accounting bodies like the financial accounting standards board and the generally accepted accounting standards on when to call the amount paid or incurred but to be paid later an expense item. And, the generally accepted accounting standards board, the international accounting standards board and other accounting standards boards of countries around the world meet to come up an international accounting standards on any item of the income statement. The main purpose of the conceptual framework is to facilitate understanding between the preparers of the financial statements and the many users of the financial statements. Evidently, The Companies Act was formed because businesses enter into contracts. Why they differ Both the Corporations Act and the Conceptual framework have different policies and purposes. For, the Companies Act is the brainchild of law makers. The Conceptual framework is the brainchild of accountants and other financial and academic experts such as the Financial Accounting Standards Board. The main purpose of the Companies Act is to penalize with the full force of the law any violators of the provisions listed in the Companies Act. Whereas, the conceptual framework was made to facilitate understanding in the transmission of information whether the company made profits or a loss during the past year or years of operation. Thus, there is no corresponding penalty for not implementing the conceptual framework policies. Truly, Both the Companies Act and the Conceptual framework have different policies and purposes. CONCLUSION The Companies Act had been crafted as a legal guide for the formation and maintenance of the daily business operations of a company. Any violations of the Companies Act will result to penalty. The Conceptual Framework has been formed by the accounting and finance experts with the purpose of ensuring crystal clear understanding of all information sent and received. The Companies Act Must be followed for fear of being prosecuted in court whereas the Conceptual Framework is used only as a guide for other people to VOLUNTARILY follow. Not implementing the conceptual framework is allowed but with fear that there can result a clear misunderstanding between the preparers of financial statements and the users of the financial statements. In conclusion, the Companies Act had been crafted as a legal guide for the formation and maintenance of the daily business operations of a company. REFERENCES Companies Act, retrieved Aug 22, 2007 < http://www.opsi.gov.uk/acts/acts1989/Ukpga_19890040_en_1.htm> Kirkegaard, H., 1997, Improving Accounting Reliability: Solvency, Insolvency, and Future Cash Flows, London, 1997; p77 -91 Hopwood, A., 2004. The Economics of Accounting: International Perspectives on Research Trends, Policy and Practice, Oxford, 2004; p. 58-62 Larson, K., Miller, P., 1995, Financial Accounting; London, Irwin Press; p 601 -606 Meigs, R., Meigs, W., 1992, Financial Accounting, London,;p 738-739 Read More