Financial and Accounting: Accounting Branch - Essay Example

Financial and Accounting Financial and Accounting 0. Introduction Financial accounting can be defined as anaccounting branch the tracks all the financial transactions of a firm, thus the financial performance of a company. Despite the fact that financial accounting and management accounting may be similar in certain ways, the two branches of accounting exhibit a host of differences. First, financial accounting primarily provides information for external users to make investing and lending decisions whereas management accounting provides information for internal users, usually the management, to make critical management decisions (Ryan 2004; Stolowy & Lebas 2007). Second, in financial accounting, financial statements are deemed important while users of management accounting focus on accounting reports as the most important products (Stolowy & Lebas 2007). Third, in financial accounting, the IFRS or IAS determine what is supposed to be included in financial reports and statements while in management accounting, managers determine what they want captured in accounting reports. Fourth, financial accounting focuses on historical information whereas management accounting basically utilizes forecasts or focus on future information (Rajasekaran & Lalitha 2011). Fifth, while financial accounting put emphasis on data reliability and objectivity, management accounting emphasizes on relevancy of data. Sixth, financial accounting yields reports about the entire company while management accounting yields reports that suit the needs of the management. Seventh, financial data are usually subject to audit verification while management data are no subject to auditing process (Rajasekaran & Lalitha 2011). Companies are required to prepare financial statement at the end of their trading periods to disclose information that is deemed crucial for various users of financial statements. 1.1. The main Users of financial statements: 1) Potential investors: Potential investors require financial statements to help them assess financial viability of putting their investment in a company. Based on the information disclosed in the financial statement, for instance profits in profit and loss account, investors are able to forecast future dividends. Also, potential investors may use financial statement figures to gauge the risk associated with investing in a particular company (Gibson 2009). For instance, investors may use high fluctuation in the reported profits of a company as an indication of high risk. Consequently, financial statements assist prospective investors in making investment decisions. 2) Shareholders: Financial statements assist shareholders in evaluating the risk and return on their investment. They make investment decisions based on the outcomes of their analysis of financial statement of the company. 3) Managers: Financial statements are crucial for managers for managing the affairs of their companies through evaluation of financial performance and position of the companies so as to make critical business decisions (Gibson 2009). 4) Suppliers or Trade creditors: Suppliers use financial statement to evaluate the credit worthiness of a company, thus make a crucial decision on whether to supply goods on credit to the company. Financial statements help suppliers to assess the possibility that they will be paid for goods they supply on credit. 5) Financial institutions: Financial institutions such as banks and other lending institutions need financial statements to help them make decision on whether to grant loans to a company or not. They use financial statements to assess the ability of a company to repay the loan within the stipulated period and also to ascertain the possibility that the loan will be a bad loan. Financial statements provide financial institutions with information to evaluate if a company has a sufficient asset base and liquidity to repay the loan (Gibson 2009). 6) Competitors: Competitors require financial statements of their market rivals to gauge their performance with those of competitors and develop strategies to boost their competitiveness. 7) General public: The general public requires financial statement of a company to determine on the environment, social and economic impact of the company. 8) Government: The government needs financial statements estimate the correct amount of taxes levied on businesses. Financial statements enable governments to establish the correctness of tax returns of companies (Gibson 2009). Financial statements also help governments to analyze the performance of various sectors in the economy, thus keep track of the economic progress of their countries. 1.2. Legal reasons why business should prepare financial statements: Financial statements are crucial tools for determining the overall performance of a country’s economy. They are also important for accurately computing tax returns of companies. Moreover, business enterprises are required to publish accounts that give true and fair view of the companies. As such, companies are legally required to publish their financial statements, for instance on quarterly basis. The FRS provides accounting standards which every firm must adopt when preparing financial statements for the benefit of financial statement users. Some of the accounting standards that businesses are required to adopt when preparing financial statements include: 1) FRS 100: This standard is a platform for new UK GAAP outlines a set of standards for companies as well as other relevant business enterprises, for example LLPs. It demands that companies prepare financial statements that display true and fair view of assets, profits, liabilities and financial position. Even though it does not expressly contain accounting requirements for preparing financial statement of firms, it directs companies on relevant standards that they may or must comply with when preparing financial statements. 2) FRS 101: 3) FRS 102: this standard is set to replace old FRSs and SSAPs. This standard derives from IFRS for small and medium enterprises. FRS 102 includes various modifications that capture company law requirements as well as additional options for accounting. The standard sets out requirements for goodwill and intangible assets accounting. The standard also entails extensive information about accounting for financial instruments among others. Based on this standard, companies that qualify may capitalize on various disclosure exemptions such as preparation of cash flow statement and associated notes. IAS regulation requires companies to prepare consolidated financial statements using EU-adopted IFRS in view of listed groups. FRS 102 can be adopted by any enterprise or listed group. FRS 102 has 35 sections, each applicable to specific accounting area. 4) FRS 103: This standard entails detailed accounting requirements for entities with insurance contracts. The standard is applicable to firms that apply FRS 102 and issue financial instruments. 5) FRS 104: Companies are expected to utilise this standard when preparing interim financial reports. The companies that apply FRS 104 are also expected to apply FRS 102. It may also be applicable for companies applying FRS 101 and intending to prepare interim financial reports. FRS 104 does not expressly require companies to prepare interim financial reports, but it applies to companies that prepare yearly financial statements under FRS 102. In a case where a UK company dealing in securities issuance and is subject to Disclosure and Transparency Rules of the FCA, but it is not obligatory to use EU-adopted IFRSs, the company is expected to prepare condensed half-yearly financial reports and must apply FRS 104 when preparing the financial statements. 1.3. Implications to the Users If There Were No Financial Statements: Financial statements are crucial tools for users for making critical decisions. As such, if financial statements were not there, various users would find it practically impossible to make meaningful financial decisions. The following are some of the consequences that users are likely to occur if financial statements were not there: 1) Potential investors and: Potential investors would have no documented tracks of the performance of the company. Consequently, they would not be in a position to determine if it is viable to invest in a company. They would not be in a [position to predict future dividends of the company, thus investment decisions would be made blindly leading to high risk of investment losses. 2) Shareholders: Shareholders would not be able to assess the risk and return on their investments, thus strategic investment decision making of shareholders would practically cease to exist. 3) Managers: Managers would face a daunting task when making strategic decision for the business because there will be no benchmark or indication of where the company performs best and where it needs improvement. 4) Suppliers or Trade creditors: Suppliers would not be capable of determining the credit worthiness of a company, thus their ability to make crucial decision whether to supply goods on credit would be incapacitated. 5) Financial institutions: Financial institutions would never be able to accurately assess the ability of any company to repay loans granted to them, thus make lending a highly risky affair and next to impossible. 6) Competitors: Competitors would find it hard to improve their competitiveness because they would be oblivious of the performance of rival companies. 7) General public: The general public would not be in a position to determine on the environment, social and economic impact of the company. 8) Government: The government would never be capable of determining the accuracy of tax returns filed by companies and would also lack appropriate tools to assess performances various sectors in the economy and hence the country’s economic growth. 1.4. Comparison between IAS and UK GAAP Standards: 1) FRS 3 requires companies to prepare statement of recognized gains and losses while Tangible IAS 1 demands statement of changes in equity. 2) In relation to party disclosure, FRS 8 permits exemption of specific intra-group transactions for consolidated accounts. On the other hand, IAS provides no corresponding exemption (IAS24.4). 3) FRS 10 allows systematic amortisation and companies to choose positive goodwill while IAS forbids systematic amortization. 4) FRS 1 requires grouping of cash flows under nine sub-headings (FRS1.7) whereas IAS require three sub-heading (IAS7.10)). 5) There is no detailed UK standard for revenue recognition, though applications have been made under FRS5. On the other hand, IAS requires detailed revenue recognition and guidance. 1.5. Conclusion Financial statements are crucial tools for decision making for various financial statement users. Without financial statements, there process of strategic business decision making as well as investment decision making would be rendered impossible. Companies are required to prepare financial statements that reflect true and fair view of their businesses so that the users of financial statements can make informed decisions based on their analysis. As such, IFRS has put in place accounting standards that all entities must adopt when preparing financial statements. Bibliography FRS, ‘Standards in issue.’ Viewed April 18, 2015 https://www.frc.org.uk/Our-Work/Codes-Standards/Accounting-and-Reporting-Policy/Accounting-Standards-and-Statements-issued-by-the/Standards-in-Issue.aspx Gibson, CH 2009, ‘Financial reporting & analysis: using financial accounting information,’ Mason, OH, South-Western Cengage Learning. Rajasekaran, V & Lalitha, R 2011, ‘Financial accounting’, New Delhi, Dorling Kindersley. Ryan, B 2004, ‘Finance and accounting for businesses’, London, Thomson Learning. Stolowy, H & Lebas, M 2007, ‘Financial accounting and reporting: a global perspective’, London, Thomson. Read More