Reasons for Financial Statements - Coursework Example

Sub Marking Criteria Marks available Marks awarded What are financial ments and what are they trying to achieve? 5 Why is it important for companies to prepare financial statements? Why do companies have to include so much information? Outlinethe needs of various users of financial statements 20 What are the main criticisms of financial statements? Complexity, timeliness etc. Make sure you develop adebate as marks will be allocated for the quality of your debate 20 Should company managers simply concentrate on keeping shareholders happy? Is maximising shareholder wealth the main priority of management? What other priorities might management have? Consider the conflicting needs of stakeholders- goal congruence etc. Make sure you develop an argument for and against as marks will be allocated for the quality of your debate 40 Quality of English 10 Range of sources and use of Harvard referencing System At least 10 Academic sources should be used 5 Overall 100 Financial statements Financial statements can be described as a compilation of reports regarding a firm’s financial condition, financial results as well as cash flows. Financial statements are supposed to show the financial information of the organisation in question as concisely and clearly as possible for either the readers or the entity itself. Generally, financial statements for any entity comprise balance sheets, income statements, retained earnings as well as cash flows statements together with other possible statements (Rathore,2009). For corporations that are large, financial statements might be complicated and may comprise a comprehensive set of annotations to the statements as well as analysis and discussion by the management. Such footnotes or annotations normally describe every item on the income statement, cash flow statement and balance sheet in more detail. Thus through financial statements, appropriate financial information is usually presented in a manner that is structured as well as in an easy form to comprehend. Financial statements are also accompanied by an analysis and discussion by the management (Thukaram,2006). Presentation of financial statements basically is a standard practice that businesses conduct after time to time and must adhere to generally accepted accounting principles (GAAP) so as to sustain information continuity as well as presentation across the globe. In addition, financial statements frequently are subject to government auditing through its various agencies, firms, accountants so as to ascertain accuracy as well as for the investing or financing purposes. Thus, financial statements are an essential aspect of ensuring honest and accurate accounting not only for organisations but also individuals as well (Walton & Aerts,2006). Reasons for Financial Statements The main aim of financial statements is provision of information regarding the performance, financial position as well as changes in the financial position of a given organization that is crucial to a broad range of users for purposes of economic decision making. Thus, financial statements are used by different users for the various reasons explained below; Managers and owners-need financial statements so that they can make crucial business decisions for the purpose of business continuity and prosperity. Financial analysis and discussion is then conducted on such statements so as to offer executive with a more balanced and in depth perceptive of the given figures (Ittelson,2009). Employees-financial statements are required by the employees so as to make collective bargaining agreements commonly known as CBA with the company’ management. They use the financial statements also to agitate for better compensation, rankings and promotion especially those that are members of labour unions (Peterson & Fabozzi,2012). Investors-potential investors need financial statements so as to assess the feasibility of investing in an organization. Thus investors frequently use analyses that have been prepared by financial analysts, hence giving them a basis for arriving at sound investment decisions (Peterson & Fabozzi,2012). Banks and other lending financial institutions use financial statements in deciding whether to fund a business with fresh pool of working capital or lengthen debt securities, for instance, long-term debentures or bank loans to fund business expansion as well as other important expenditures. Government-the government requires a company’s statements for taxation purposes. Thus a certain percentage of the company’s profits are taxed and money remitted to the government (Fridson & Alvarez,2011). Financial statements are also useful in detecting, catching as well as avoiding costly mistakes. Thus, a regular schedule for reviewing financial statements assists in detecting, catching and avoiding mistakes early. Financial statements also assist the owners of the business in detecting fraud, theft or any other related illegal activities in the business (Peterson & Fabozzi,2012). Question 2 Basically, financial reports are supposed to fulfil the requirements of various decision makers. On many occasions, timeliness has been identified as being one of the key aspects of information as far as financial reporting is concerned. The rising needs of stakeholders and shareholders with various operational interests in financial reports have led to the pursuit of credible and timely financial reporting. Timeliness of financial reports, courtesy of the International Accounting Standards Board, can be defined as “availability of information needed by decision makers for useful decision making before it loses its capacity to influence decisions.” To achieve this goal, financial reports should be availed in time so as to inform making of decisions. This is why financial reports must be published immediately after the reporting period ends (McGee,2006). Timeliness in financial reporting should not be reduced merely to a busy season that is well managed,but instead it needs cautious yearlong planning as well as monitoring such as audit field work ,data processing etc. In some occasions, the need for timely reporting should be balanced against reliability requirement which actually is also one of the features of information as far as financial reporting is concerned. Whereas organizations must not forfeit reliability for timeliness, insignificant gains in precision should not be bought at the cost of indefinite delay for instance accounting estimates (Shaw & Barry,2014). That is why legislative deadlines for submission of financial statements ought to be seen as least criterion instead of an ideal goal. In addition, the extra costs of timeliness in financial reporting such as overtime and extra staff also should be put into consideration. As is the norm, the incurred cost must never exceed the benefits to be derived. Thus timeliness in financial reporting is a yardstick for measuring transparency as well as quality of reporting. Thus the time that has lapsed between a firm’s year-end in relation to the release date of the financial information to the public is basically correlated with the quality of information given. Thus financial information turns out to be stale after some months, and definitely after 2 or 3 years and thus, the stale it is, the less applicable it is to prospective creditors and investors. Issuance of accurate, comprehensive and excellent financial information 2 to 3 years after year-end is not as attractive as issuing information that is less comprehensive and complete some months after year-end. Nevertheless, the following recommendations regard some of the techniques of improving timeliness in financial reporting for organizations; Activity should be recorded through the entire year-thus an organization must undertake transaction processing at the very least quarterly so as to make sure the data collected is accurate and complete. This procedure must comprise suitable reconciliations so as to recognize required adjustments and financial examination of provisional management reports to make out incomplete or anomalous data that ought to be corrected. Hence, this verification exercise must essentially be useful in recognizing amounts that will require estimation as an aspect of the yearly verification exercise so that data required in making those estimates at year end can be taken through the entire period. The government’s specified accounting procedures and policies must identify the items that require estimation and come up with specific steps to be adhered to in preparation of each different type of estimate. The organization should also ensure electronic distribution of the financial report so as to prevent possible delays and save time. Thus, the organization should first distribute its financial statements electronically such as posting them on its website as well as emailing electronic file (Collings,2015). The organization should also contract professionals through procurement of independent auditors who should name a public release date for the report. The organization can also contract other professional services apart from auditing but have a relation to the financial statements such as actuarial services who should also name a public release date of the statements and explicitly specify that such services should be completed in time so as to allow the organization to beat the deadline (Rosenfield,2006). Complexity in financial statements Financial disclosure overload and complexity issues have been not only explored but also debated by several institutions, groups and individuals. Thus, according to a KPMG 2011research, disclosure has developed in both complexity and volume posing a dilemma especially for small investors who may be required to make suboptimal investing decisions because of their incapacity to comprehend the complexity and volume of financial statements (Madura,2014). Thus disclosure has grown roughly by 16% generally during the 6 year period with footnote disclosure growing by 28% over similar period. Thus footnote disclosure has for instance expanded at a quicker speed than disclosure and has been especially acute in the post-retirements and pension benefits, financial derivatives, fair value as well as hedging areas. Complexity of financial statements and standards as well as the volume of authorized disclosures are the most important contributors of the issues of disclosure complexity and overload (Iannaconi & Sinnett,2011). Various perspectives on disclosure complexity and overload thus comprise of different views since the perspectives of financial information preparers usually differ from those of the information users. A very significant contributor to disclosure complexity and overload is growing complexity of investments, transactions, relationships and financial instruments. Anecdotally, some annual financial statements have expanded normally in years which were marked by significant complexities correlated to spinoffs, restructurings, acquisitions or similar events. Nevertheless the following recommendations should be implemented by organizations so as to curb disclosure volume and complexity challenges; The SEC must issue an interpretive release aimed at addressing the tolerability of cross-referencing in addition to a technique of tackling immaterial items to decrease unnecessary and redundant disclosures. In addition, summaries of important accounting discussions and policies especially recently applied or soon to be applied accounting policies must be streamlined so as to eradicate pointless redundancy as well as patently irrelevant disclosures. Preparers must also expand their delivery formats by including graphic and tabular techniques. The SEC must also move together with especially its 21st Century Disclosure Project aimed at enabling greater utilisation of technology so as to prevent pointless repetition of information in numerous filings. Preparers must shut in disclosure of risk factors to specific company exclusive risk factors as considered by item 503(c) of Regulation S-K. The FASB must accelerate contemplation of the Disclosure Framework so as to determine efficient approach to disclosure that appropriately balances disclosure deliberations (Iannaconi & Sinnett,2011). Finally accounting standards that allow disclosure in provisional period financial statements must comprise stipulations that are the same as to those set up in Regulation S-X that expressly allows disclosure omission where there has been no important modification in the item from the date of the newest annual financial reports (Iannaconi & Sinnett,2011). Question 3 The discussion that exists between shareholder value perceptions as well as stakeholder perception has until now been critically argued. There are those of the opinion that stakeholder interest ought to be greater than maximisation of shareholder wealth, nevertheless, there are those that claim maximisation of shareholder wealth ought to be of prime interest. Nonetheless, it is clear to identify that maximisation of shareholder wealth is the aim of a company and maximisation of shareholder wealth ought to be better than stakeholder interest in the interest of both stakeholder interest and shareholder interest (Walton,2007). A shareholder is a corporation or individual owning stock in a private or public company. Thus a shareholder may opt to become a member of the board of directors through making a vote. Thus, maximisation of shareholder wealth implies the maximisation of dividend flow to shareholders through the course of time. On the other hand, stakeholders are individuals and groups who either are harmed by or benefit from, or rather whose rights are regarded or contravened by various corporate actions. Examples of stakeholders mostly comprise customers, suppliers, employees as well as the community such as shareholders together with other investors. Thus as Fredrick R. Post states, shareholder theory argues that management be permitted to pay no attention to the concerns of the other constituencies as they pursue the concerns of the shareholder owners (Shaw & Barry,2014). Furthermore, in the finance perspective maximisation of shareholder wealth is assumed as being clearly logical. On the other hand, stakeholder theory has its initial origins in research concerned with ethics, society and business. It claims that managers ought to take care of all the interests of stakeholders in the organization, comprising not only customers, financial claimants, governmental officials and communities. In addition, Thomas L. Carson states that corporations must be managed for every stakeholder and not just for the interests of shareholders (Shaw & Barry,2014). Nevertheless, there is some misunderstanding of both stakeholder theory and shareholder theory which needs to be clarified. Thus some experts argue that managers can do anything so long as they are making profits, irrespective of the ethical issues involved. However, the shareholder theory stipulates that managers must only earn profits only via nondeceptive legal means. Furthermore, at times it is argued that shareholder theory is not eager to provide company’s funds for training employees or to charitable ventures, nevertheless, in reality training employees enhances their skills making them more efficient at work and offering better service than before (Shaw & Barry,2014). In addition, the stakeholder is normally misinterpreted that a firm is not required to concentrate on profitability. Even though the principal goal of the stakeholder theory is the interest of the involved parties, it should also be achieved through balancing every stakeholder’s interest including those of all shareholders. Maximisation of shareholder wealth should be a greater purpose over stakeholder interests. Various arguments by scholars claim that there is normative and factual consensus that managers must act entirely in the best economic interests of the firm’s shareholders with the best way to this concern is through pursuing the collective social welfare by making managers strictly accountable to the interests of the shareholders (Shaw & Barry,2014). The rationality in factual consensus demonstrates that economic interests forces corporate managers to maximise the wealth of shareholders by amassing a sequence of various propositions as if firms can be managed efficiently because of competitive markets for services and goods. After this, the pursuit of economic effectiveness builds company maximisation of wealth and in the process; the company’s wealth maximisation strategy matches maximisation of shareholder wealth (Shaw & Barry,2014). One reality that is for sure is that several companies currently choose to satisfy their stakeholder’s interest. Though it may not be wrong or right, it usually is up to the company’s particular objectives to various perspectives. Nevertheless the intention of stakeholder’s interests must not clash with the maximization of the shareholder value. Since serving stakeholder’s interests can generate profits for the companies as well as value for shareholders. Consequently, one of the major objectives of any company is maximization of shareholder value and not disregards the interests of the stakeholders (Shaw & Barry,2014). Finally, the governing aim of the firm should be maximisation of the firm’s value for its shareholders; however, to accomplish this objective, the company also needs to serve the economic interests of every stakeholder over time. Thus maximisation of the interests of stakeholders also maximises the wealth of the shareholders(Shaw & Barry,2014). List of References Fridson, M.,& Alvarez, F.(2011) Financial Statement Analysis:A Practitioners Guide. New York: Wiley Global Finance. Iannaconi ,T, & Sinnett ,W.(2011) Disclosure Overload and Complexity:Hidden i Plain Sight. Research. New York: KPMG. Jeff, M(2014). International Financial Management. New York: Cengage Brain. McLeay, S.,& Riccaboni ,A(2002). Contemporary Issues in Accounting Regulation. Massachussets: Kluwer Academic Publishers. Paul, R. (2006)Contemporary Issues in Financial Reporting:A User-Oriented Approach. New York: Routledge. Peter, W(2007). The Routledge Companion to Fair Value and Financial Reporting. New York: Routledge. Peterson, P.,& Fabozzi F(2012). Analysis of Financial Statements. New York: Wiley Global. Rao, T.(2006). Management Accounting. New York: New Age International. Robert, M. (2006)Timeliness of Financial Reporting in the Russian Energy Sector. Miami: Barru University Press. Shaw ,W.,&Barry, V.(2014). Moral Issues in Business. New York: Cengage. Shirin, R.(2009). International Accounting. New Delhi: Asoke K Ghosh. Steven, C. (2015)Interpretation and Aplication of UK GAAP:For Accounting Periods Commencing on or After 1 January 2015. West Sussex: John Wiley & Sons Ltd. Thomas, I.(2009). Financial Statements. New York: Career Press. Walton, P,& Aerts W.(2006). Global Financial Accounting and Reporting:Principles and Analysis. New York: Cengage. Read More