The Importance of Financial Statement - Example

The importance of financial statement, its presentation and preparation can identified from the fact that different institutions are laying importance on preparing financial statements in the determined form. This helps to ensure easy comparability and provides the user of the financial statement with useful information based on which decisions can be taken. The AASB has determined the framework based on which organizations prepare and present the financial statement and look towards ensuring that the different requirements of International Accounting Standard Board are achieved. This paper looks at evaluating the manner in which financial statements are prepared by organization and the different areas they need to comply while preparing financial statements. While looking to highlight the manner in which organizations abide with the different financial requirements focus is being given on areas like matching/accrual principle, substance over form, prudence, comparability and materiality. This will thereby help to identify and understand the manner in which financial statements are prepared and presented so that the users which include both the inside and outside users are able to take correct decisions. The preparation of financial statement requires that business follows a policy of matching principle. This requires that the revenues should be matched with the expenses and all the transactions which take place within the accounting year should be recognized within the same period. It has been clearly identified that the process of matching principle should be followed by proper disclosure with regard to the income, expense, assets and liabilities in the financial information (Boyer, 2009). This will provide the user with the required information and will help to ensure that the different transactions are recorded clearly and identified accurately. The corporate entities thereby have to take the additional role of ensuring that all the information is correctly provided and no material information which could have relevance on decision making is concealed. The process of preparing financial statement further requires that substance should be given importance over form. This states that all information should be provided in monetary terms so that people can make informed and better decisions through it. The process should be such that it should help the users to gather all valuable and important information based on it. This has to be followed by ensuring proper prudence which states that the information which is provided is true and reliable and can be verified. It is imperative that the information provided is correct and true and no false information is provided. This increases the role of auditors as they have to ensure that the concept of prudence is followed and all the information which is provided is correct (Tournier, 2000). Having the financials verified by auditors will ensure that the information is true and has been checked. This will thereby help to reduce the level of risk for the investors and will ensure better and informed decisions through which overall business decision multiplies. The financial statement further prepared should be matched by proper comparability so that the business is able to ensure that the financials can be easily compared. This will require that organizations follow the international standards which has been provided and prepares financial statement in a manner through it facilitates easy comparison. Following standards like IASB, FASB will ensure that the different financials are prepared as per the required standards and will facilitate the process of comparison. This is one of the reasons which has forced organizations to prepare different financial statement based on different accounting standards and principles so that it facilitates better comparison with every organization and ensures that the process provides effective decision making. The financial statement further has to ensure that all material information are properly disclosed. This will help to ensure that no information is concealed and the users are provided with all information which has relevance on decision making. The process of preparing financial statement should also ensure that there is no insider information which could have an impact on decision making and all information which will help in decision making is clearly provided. This will help to ensure that the process of decision making gains a proper process where the different fundamentals have been properly accounted for and will provide the different users with maximum information. The process will also lead towards better reliability and relevance and will multiply the effectiveness of preparing and presenting financial statement. The process of preparing financial statement thereby cannot be done in isolation but needs to include a lot of different and relevant information. This will facilitate the process of decision making and will help to develop a process through which better control will be exercised in the manner different business decisions are taken. The process of preparing financial statement requires that the future income is recorded as up-front revenues by recognizing them as financial assets instead of intangible assets. This will ensure that the transaction are provided at correct fair value and will help the user of the financial statement to be able to control the different business transactions and provide a complete description of the different transactions which takes place. This will help to ensure all information which has relevance is completely provided and recorded in the same accounting year so that the financial presents the same information for the year in the correct manner. The preparation of financial statement has to give importance to the different asset value and has to ensure that the carrying value of the different assets is presented at fair value. This will ensure better and informed decision making as the process will ensure that all assets and liabilities are recorded (Penman, 2006). The user will be benefitted as disclosing the real value of the assets and liabilities of a particular date will ensure that the different economic factors which have an impact on the performance is clearly provided and presented. The user will thereby be able to understand the financial statement in a better way and using the different method of valuation and standard will ensure that the valuation of the different assets and liabilities is done correctly. The preparation of financial statement further requires that the corporate entities properly classify both the current and non-current assets and liabilities in their financial statement. This will be the responsibility of the directors to ensure that the current liabilities are settled within a period of 12 months as there have been situations when adjustments have been made to treat the same as non-current liabilities. This will help to ensure that the financial statement is prepared as per the different requirements and will highlight the different value of the assets and liabilities correctly. The same can be analyzed while looking at the manner in which inventory is recorded. The matching or accrual principle will require that the inventory is recorded at the carrying rate which is the fair and actual rate in the market. This will ensure that the inventory is not either high or low and will show the correct value. This will ensure that the financial statement provides a complete description regarding the correct value of inventory on a particular date. The process should also ensure that substance over form is carried which will look at providing all inventory and ensuring that it is valued at monetary terms. This will require that all inventories which the business has should be correctly recognised and recorded. This will help to multiply the value and effectiveness of recording inventory and will provide correct and true information to the people. The concept of prudence also has its applicability in case of inventory (Financial Accounting Standard-157, 2010). The fact that inventory needs to be recognized at the fair value ensures that the concept of prudence is clearly and correctly followed. This will ensure reliability and will provide an opportunity through which information provided will be correct and fair. In addition to it the manner in which inventory is valued should be consistently done. For example suppose first in first out method of valuation is used than the same method should be followed on a continuous basis. This will provide an opportunity to ensure easy comparability with the previous year and also ensure comparison with other organizations which uses the same valuation method. The overall mechanism will thereby multiply the manner in which inventory is recorded and will ensure better decisions. The process of recording also requires that all material information is clearly identified. The method of inventory valuation should clearly provide all information regarding inventory like the valuation method, the quality of inventory and other information through which overall presentation of financial statement will improve (Villmann, 2006). This will ensure that the manner in which financial statement is prepared considers several important factors and objects through which the overall relevance of preparation of financial statement is improved. The process of preparation of financial statement requires that the focus is given on different areas and looks at providing all information through which the users will be better placed to take different decisions. The process of preparing financial statement thereby needs to be very descriptive and should look at providing every details which is useful for the investors. A complete detail regarding the different expenses, income, revenue and expenses should be provided. Further, the calculation of the different expenses should be shown clearly. This will help to ensure that the user of the financial statement is able to use it for decision making. This will also provide a directive through which the user of the financial statement will be able to look at the different assets, liabilities, profitability and examine the overall efficiency of the system (Barth, 2006). The process will act as a guide for the user of financial statement to use the different information which is available and reduce the level of risk to a certain level by having better information regarding the working of the organization. This process has given importance to fair value accounting so that the different benefits by following the prescribed pattern can be ensured. Since, fair value involves a “logical pattern which reflects globalisation and international economic integration” (Barlev & Haddad, 2003) the results and decision taken on the basis of this are better and correct. Even investors prefer fair value as the results reflect the actual scenario prevalent in the organisation. This helps the investors and others to understand the actual financial position of the organization on a particular date. The investors are thereby better placed as they have more information based on which better decisions can be taken. Preparing financial statement helps to develop a process which will help the investors in the following manner The investors and the lenders will be able to understand the actual position of the organization on a particular date. This will help people to understand the actual health of the organization and will help the investors to be able to decide their actions based on the performance of the organization (Barlev & Haddad, 2003) The financial statement if prepared in the correct form with adherence to the different accounting standards and principles will help to understand the true and fair position of the organization. In case of inventories we see that the value of inventories is done at market price which is closer to the fair value than the historical concept (Barlev & Haddad, 2003). This gives a better picture as the actual value helps to make decision making process better. It helps in facilitating comparison with other firms and will develop a process through which overall importance and relevance is given to different areas of financial statement Thus, the preparation of financial statement requires looking at different determinants and factors and providing all the information so that better and informed decisions can be taken. The process of preparation of financial statement needs to adhere to the areas like matching/accrual principle, substance over form, prudence, comparability and materiality. This will thereby help to identify and understand the manner in which financial statements are prepared and presented so that the users which include both the inside and outside users are able to take correct decisions. The users will be thereby better placed and will be able to take informed decisions so that risk is reduced and the chances of return are increased. References Barlev, Y. & Haddad, T. (2003). Fair value accounting and the management of firm. Critical perspective on accounting, Australia Taxation Board, Australia Barth, M. (2006). Including Estimates of the Future in today’s Financial Statements. Accounting Horizons, 2 (3), 271-285 Boyer, R. (2009). Assessing the impact of fair value upon financial crisis. International Swaps & Derivatives Association, Australia Financial Accounting Standard-157. (2010). Retrieved on October 5, 2014 from http://www.gasb.org/pdf/aop_FAS157.pdf Penman, S. (2006). Financial reporting quality: is fair value a plus or a minus? The CPA Journal Tournier, J. (2000). La revolution compatible. Accounting Values & Reporting, Chapter 18, Paris Villmann, R. (2006). Fair Value, Historical Cost, Replacement Cost how should asset and liabilities be measured on Initial recoginition? Accounting Standard Board, Canada Read More