Assignment in Financial Accounting
Companies operate to achieve varies goals. They may be interested in providing a healthy work environment for their employees, in reaching a high level of control, or making contributions to civic and social organization and activities. However, to meet these goals, a company must first achieve its two primary objectives: earning a satisfactory profit and remaining solvent. If a company failed to meet either of these objectives, it will not be able to achieve its various goals and will not be able to survive in the long run.
In order to show others how well one company has performed, financial statement is necessary, it is because ” Financial statements are accounting reported used to summarize and communicate financial information about a company. A company’s integrated accounting system produces three major financial statements: the income statement, the balance sheet, and the cash flow statement. Each of these statements summarizes specific information that has been identified, measured, recorded, and retained during the accounting process. ” Basically, The financial statements and what they report are as follows.
The income statement (sometimes referred to as the ” P;L” or profit and loss statement) reports revenue and expense events that occurred during the reporting period. A revenue minus expenses equals net income (also referred to as profit or earnings). The balance sheet reports the business’s assets, its liabilities, and the owners’ equity in the business as of the last day of the reporting period. The statement of cash flows reports cash inflows and cash outflows from financing events, investing events, and operations during the reporting period. The financial statements reflect the effects of economic events on the business entity.
Financing may be obtained from owners, lenders, or both. When owners provide financing, assets and owners’ equity on the balance sheet increase. When money is borrowed from lenders, assets and liabilities on the balance sheet increase. Neither of these financing events is reported on the income statement. When a business invests in assets like inventory or equipment, payment is made at time of purchase or the purchase is on credit, with payment due some time later. If assets are bought for cash, the balance sheet will report the asset purchased and show cash lower by the purchase price.
If the item is purchased on credit, the balance sheet will report the asset purchased and a liability will have increased by the amount of credit extended by the seller. Neither of these investing events is reported on the income statement. The income statement reports only those events that reflect the measured net income from carrying out the operating activities of the business. In fact, the financial statement could be used for a wide rage of user. For example, from time to time, owners and creditors want financial information about the business. Owners of a small business may want information very frequently, e.
g. , monthly, to help manage the business. Creditors may call for information less frequently to evaluate the company’s ability to repay a loan. Aside from the creditors and owners, there are seven major user groups require the statement. Investor group: Both existing and potential shareholders are integrated in this group. Information will be required for them to consider whether to invest in the business or sell current investments. In addition, dividends and share price have to be taken into account by investors in their investment. Short-terms for the investors are interest, and long-term view is future earnings.
They might also concern profitability and its trend over a period of time. Employees: The employees would be interested in clear, simple and understand form of information about the stability and profitability of their employers together with a value-added approach rather than just a profit and loss account view of performance. They need the information on business performance generally for the wage and salary negotiation, assessment of current and forward opportunity in terms of employment. Lender: the long, medium and short term lenders of money are concluded in this group, this group usually referred to as loan creditor group.
The most important thing that the loan creditors will be concerned which is ” are they solvent? ” For short-term loan creditor, the cash flow statement will be considered at once. The bank would also have an interest in the net realizable value (NVR) of the assets. Both medium and long-term creditors will review the future cash flow potential of the business. They would also be interested in current and future profitability and growth prospects of the entity, in order to ensure that the debtors are able to return the money.
Suppliers: the trade creditors are also included in this group since they are very important element in the supply of a business’s working capital. Suppliers would have interest in the firm’s ability to meet its short-term liabilities and the financial stability of the business in terms of cash flow. Current and future cash flow together with current profitability will also be taken into account. All these information enables them to determine whether amounts owing will be paid when due.
Customers: the majority of customers are very much concern about the maintenance of an enterprise, particularly when they have a long-term involvement with or rely on the enterprise. The information of the business’s short and longer-term financial stability, its ability to supply high quality goods and service, and sound after-sales service will be considered by this group. Government: The government is the decision maker; they are interested in the allocation of resources and their forward economic places are influenced by performance of all different kind of business in the economy.
TA published financial statement information will be used for company taxation and VAT, regulating the activities, and providing a basis for national income and related data. Furthermore, they also require the current financial report as a base of economic models assessing future performance. The public: This group would have interest in the substantial contribution is made to the local economy by the enterprise together with the local and national factors such as employment and environment. Some of these issues are included in their financial information and long-term strategy.
Overall, relevance and reliability are major characteristics of a financial statement. Irrelevant information is useless; consequently, the financial statement must be reliable and relevant in order to meet the basic objective. Information must be accurate since they are always influencing the decision of the users, and moreover relevant accounting information is capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations.