Information Requirements for Financial Statements - Essay Example

INTRODUCTION This report provides an insight into the information requirements of various users of the company's financial ments. It has been formulated and designed to address the issues faced by the company in terms of providing useful information to its stakeholders. Therefore, after identifying the potential users of statements, it assesses the qualities essential for financial statements reporting and evaluates the importance of financial statements formats and technology in the process of accounting and financial reporting. THE USERS OF FINANCIAL STATEMENTS AND THEIR NEEDS The users of financial statements are the various stakeholders of a company that are concerned with the company's performance, progress and position during a financial year. The financial statements should provide useful information to the relevant users and stakeholders of the company with respect to their specific needs. The main users of financial statements and their needs are discussed below: EXTERNAL USERS Investors and Shareholders This is the most important group interested in the financial performance, financial position, financial adaptability, cash generation and cash flow status of the company. The shareholders and investors invest their money into the company and need the information from financial statements to asses the company's performance in terms of managing and utilizing their investments and generating profit out of it. Lenders and Creditors The lenders and creditors of a company are interested in the company's position in terms of liquidity and solvency. The financial statements of a company should provide relevant information to its various lenders and creditors so as to enable them to analyze the company's ability to pay its short and long-term liabilities and obligations. Government The regulatory authorities and government agencies are concerned with the full and clear disclosure of information in the company's financial statements. The government ensures that the company prepares the financial statements in the light of relevant rules and regulations. This need of the government is met by the auditor's report, which is one of the most important sections of the company's annual report. Customers The customers of a company are interested in the company's position in terms of compliance to government rules and regulation. The disclosure of relevant information can strengthen the customer trust in the company. General Public and Analysts General public and analysts could be considered as the company's prospective investors or they may approach the company's financial statements to provide the information regarding the company's investment and profitability potential to the investors. They are concerned with the company's financial position and performance to analyze the future prospects of the company. INTERNAL USERS Management The company's management is also among the major users of financial statements. They need to draw useful information from the financial statements in order to realize the company's revenues and their share in the company's profitability. Apart from that, they also need information from financial statements to analyze the result of their performance throughout the year and make provisions regarding the future. Employees The employees are also the internal users of the company's financial statements. They are the one contributing their efforts in the company's performance and profitability. They need information from financial statements to evaluate how the company is compensating them for their efforts as compared to its overall profitability. NECESSARY QUALITIES FOR FINANCIAL STATEMENTS The financial statements should contain the following qualities so as to provide maximum useful information to the various stakeholders of the company: Understandability The financial statements should be readable and understandable for all its targeted users. All the information and disclosures included in the financial statements should be well-presented to help the comprehension of prospective readers so as to be beneficial for their future decisions. Materiality The information presented in the financial statements should be material in the sense that it provides quality and significant information to various stakeholders of the company. If the information provided is immaterial, it would affect the understanding of readers. Reliability The financial statements of a company should be reliable as information for the readers. They should be free from any errors or flaws. They should avoid misrepresentation of the company's financial position and performance. The information should be presented honestly and faithfully. Relevance The information presented in financial statements should be relevant in terms of influencing the economic decisions of the stakeholders. The information should enable the readers to evaluate and assess the company's past as well as future performance. Comparability The information in the financial statements of a company for a specific point in time should be comparable to the financial statements of another company in the same industry or sector for that particular time. It helps the users to compare the two or more companies and base their decisions accordingly. Classification The financial statements of a company should be properly classified and divided into sections in compliance with the rules and regulations of the accounting standards followed by the company. LAYOUT OF FINANCIAL STATEMENTS AND INFORMATION TO USERS The financial statements of a company comprise Profit and Loss Statement, Balance Sheet and Statement of Cash Flows. The layout and format of all these statements should be carried out on the basis of accounting standards and regulations. The importance of financial statement format and layout in providing useful information to the users is discussed below: PROFIT AND LOSS STATEMENT This statement consists of the following information: Income: This section of the profit and loss statement provides information to readers regarding the gains and revenues obtained by the organization. Expenses: This section exposes the expenses incurred by the company relating to production, distribution, selling, administration and other aspects. This helps a user comprehend the ratio of income to expense in a company. BALANCE SHEET The balance sheet comprises the following sections: Assets: This contains information regarding the company's current and non-current assets and therefore represents the net worth of a company. It exhibits the company's investment in assets and also helps the users to assess the proportion of assets to income. Liabilities and Equity: This exposes the total amount of funds generated by the company from internal and external resources i.e., in the form of shares and loans. It also shows how much the company owes to its creditors/lenders and therefore, shows the financial position of the company in terms of liquidity and solvency. STATEMENT OF CASH FLOWS It contains information regarding the company's cash flow with following sections: Operating Cash Flow: Cash generated from internal operation mainly sales. Investing Cash Flow: Cash generated from internal non-operating activities for example assets Financing Cash Flow: Cash disposed to and exposed from external sources such as lenders, investors etc. ACCOUNTING PROCESS AND BENEFITS OF TECHNOLOGY The recent developments in technology have influenced the field of accounting and the procedures to carry out the accounting process. The use of technology in accounting process has become an essential practice in today's world. Following are some of the ways by which technology has assisted the accounting process: The availability of pre-designed accounting software has helped the organizations to carry out their accounting process with ease and convenience. The time-consuming accounting procedures that were accomplished after putting in a lot of energy and effort are being done in a matter of few clicks. The computerization of financial data and records helps the auditors to carry out the audit process with more speed and accuracy whereas it has also enabled the organizations to review and audit their records internally on a regular basis. Recent enhancements in technology have enabled the organizations to have a thorough eye on the company's accounting records and financial performance. For the presentation slides, please click on the icon below: References An introduction to Statement of Principles for Financial Reporting, accessed January 12, 2006 from the World Wide Web: http://www.frc.org.uk/documents/pagemanager/asb/notes.pdf Financial Analysis, accessed January 12, 2006 from the World Wide Web: http://cbdd.wsu.edu/kewlcontent/cdoutput/TR505r/page41.htm The ASB's Revised Statement of Principles for Financial Reporting, accessed January 12, 2006 from the World Wide Web: http://www.accaglobal.com/publications/studentaccountant/28374 Skidmore Steve (19 Dec 2002), Information Technology in the Accounting Curriculum, accessed January 12, 2006 from the World Wide Web: http://www.accaglobal.com/publications/studentaccountant/774245 Courtis John K., Readability of Annual Reports: Western versus Asian Evidence, accessed January 12, 2006 from the World Wide Web: http://www.emeraldinsight.com/Insight/ViewContentServletFilename=Published/EmeraldFullTextArticle/Articles/0590080201.html Read More