Financial Accounting And Reporting

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Purpose Of Financial Accounting And Reporting

Main purpose of financial accounting and reporting is to prepare the financial statements to encapsulate the operating performance over a particular period of organization (Albrecht, Stice and Stice, 2010). Generally, these statements are prepared on an annual basis by considering the norms that are described in Generally Accepted Accounting Principles (GAAP). Present project report will include the description of financial statements along with its significance. Further, the needs of different users will be stated regarding accounting information in this report as well. For the assessment of financial performance, accounting ratios will be calculated. For better explanation, financial statements will be prepared from the trial balance and incomplete information.

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Different users of financial statement and their needs

Users of the financial statement are stakeholders of the business who are affected by their operational activities. They require information of business in order to make viable decision for their benefits. Description of financial users of business is as follows-

Owners- Financial statements are required by the owners of business to assess the return on the capital investment. By considering information of the financial statements, they are able to predict the profitability from operating activities of organization and can make their investment decisions (Alexander and Jermakowicz, 2006).

Managerial person- Management of entity requires financial information of business for the formulation of future strategies to achieve their aims and objectives. By considering this data, decision regarding business activities is taken by them. On the basis of this information, management of the organization explores new opportunities by using their financial strengths.

Employees- Human resources of the enterprise play a vital role in the success of business. All operational activities are accomplished by labour of the organization. Thus, they are interested to attain information regarding their growth and future opportunities by working there (Ball, 2006). For this purpose, information related to basic pay, infringements, job security and retention policy is assessed by them.

Suppliers and customers- Suppliers provide raw material to the business thus, they are interested in their solvency and liquidity position. By using this information, they are able to determine the capacity of entity for the payment of credit purchases. Production is done by the business by considering all needs of final customers (Orens and et.al., 2009). Thus, customers are interested in pricing policies of business because it will directly affect their buying decision. In addition to this, they also assess the market position because their final decision is based on the reputation and brand image of the entity.

Investors and lenders- Investors and lenders had provided funds to the entity thus they required information of business for the prediction of return. For this purpose, they consider their profitability and previous trend to make further decisions of investment (Overton, 2007). Lenders assess the solvency of business on the basis of their assets to determine that whether organization is in position of repayment of loan and interest or not.

Government- Regulatory authorities are the external users of financial information of business. In these criteria, several authorities are covered such as tax department, environmental institution, political parties etc.

Public- Public is also considered as a stakeholder of business. It is because the organization is operating for the society by using their resources. Thus, public requires information regarding opportunities which are provided by the entity such as investment or employment. For this purpose, they assess financial statement of the company.

Explanation of legal and regulatory influences on financial statements

Financial statement of company is influenced by the provisions of several legislations and regulatory norms. According to the Companies Acts 1985, 1989 and 2006; corporate entities are required to prepare their financial statements as per the guidelines of IFRS and IASB. They should publish their financial statements in standard format with annual reports. Annual accounts of partnership entities are governed by Partnership Act 1890 (Pratt, 2010). As per this Act, proper information should be recorded regarding accounting transactions along with the partnership transactions. However, there is no as such requirement for the sale traders. According to EU directives financial statements are required to provide true and fair view to the users. Due to this aspect, organizations that are operating in UK are required to implement International Accounting Standards (IASs) and International Financial Reporting Standards for making adjustments. Further, business policy of entity should be supported by these standards to provide the reliable information to stakeholders. Income statement of entities is prepared on the principle of accrual assumption and balance sheet of company is prepared by using principle of accounting equation. Further, accounting transactions are recorded by using dual principle (Schulze, 2007). All entities are required to meet the terms which are described by the regulatory authorities. Description of accounting standards is as follows-

International accounting standards board (IASB) - IASB is regulatory authority which develops standard principle and guidelines for the recording of accounting transactions. Norms provided by IASB is basically for multinational entities to bring consistency in accounting records of company. In accordance with these standards, entities are obliged record financial data by using dual entry system. Further IASB had provided standard structure for preparation of financial statements of company.

International financial reporting standards (IFRS) - International financial reporting standards are regulatory provisions issued by International accounting standards board. In these standards guidelines are described which are required to be followed by entities while recording accounting transactions (Kimmel, Weygandt and Kieso, 2010). As per this standards company is obliged to prepare their financial statements in accordance with standard formats.

Assessment of its implication on its users

Each stakeholder plays a vital role in the success of business. They require accounting information to make viable decisions regarding entity. For this purpose, managerial people are held accountable (Hopwood, 2007). They are required to provide accurate and reliable information to the stakeholders on timely manner. Further, provided information should be relevant so it can assist in decision making process. In the given case scenario of ABC Ltd., financial managers will be liable to provide information to the users.

Government: Information is required by regulatory regarding tax purposes. Further, they assess that ABC company is operating in accordance with the legal norms or not. If government is not satisfied with the provided information by company, then they can issue legal notice for scrutiny.

Suppliers: Suppliers make decision by considering liquidity of the entity. For example if there is sound liquidity of the entity then they will provide good credits to them. In situation of adverse liquidity they will prefer cash sales which will increase the cash flow of organisation.

Investors: Investors are mainly affected by the profitability of business as their return i.e. dividend is affected by it. In case ABC discloses inappropriate records then such as results in causing major implications in future. This can be related to causing delay in making payment of dividend due to decreasing profitability.

Customers: Information is required by customers regarding the product and price. Their buying decision is affected by quality and quantity provided in particular product. If, company will not provide suitable product customer will move to another company.

Employees: worker of the ABC compnay requires information regarding profitability as they are given rewards for their performance. In case of absence of appropriate pay they will not motivates and their performance will be adversely affected.

Explanation of laws and regulations related to the accounting and reporting standards

Companies Act (1985, 1989 and 2006) – In the stated Acts guidelines are provided for corporate entities from their formation to dissolution. An entity is said to be company if it is registered in following Acts (Jackson, Sawyers and Jenkins, 2008). In the provision of this range of regulations is described to control their operating activities and to promote fairness.

International accounting standards board (IASB) - IASB is regulatory authority which develops standard principle and guidelines for the recording of accounting transactions. Norms provided by IASB is basically for multinational entities to bring consistency in accounting records of company. In accordance with these standards, entities are obliged record financial data by using dual entry system. Further IASB had provided standard structure for preparation of financial statements of company.

International financial reporting standards (IFRS) - International financial reporting standards are regulatory provisions issued by International accounting standards board. In these standards guidelines are described which are required to be followed by entities while recording accounting transactions (Kimmel, Weygandt and Kieso, 2010). As per this standards company is obliged to prepare their financial statements in accordance with standard formats.

Explanation of variation of information needs of different user group

Several stakeholders are interested in the financial information of business which has been explained in task 1 of this report. Each stakeholder requires different information to make their respective decisions. Need of information may vary as per their needs. Bifurcation of stakeholder can be done in internal and external stakeholders (Llewellyn and Milne, 2007). Management, employees and owners are the internal stakeholders of the entity. On the other hand, customers, suppliers, government, investors and lenders are external stakeholders of business.

Managerial persons of organization are interested in financial information of business for preparation of operational strategies to achieve their aims and objectives. By using this data decision regarding business activities is taken by them. On the basis of this information, budgets are prepared by them for forecasting of new opportunities by using their financial strengths. Employees require information of business to assess their growth and available opportunities. On the basis of this information, they make decision regarding dismissal and retention. Requirement of financial information is for purpose of profitability (Neu and Graham, 2004).

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External stakeholders have their different requirements of financial data to make viable decisions that are related to the business. Government is interested in the financial statements of entity for the assessment of tax liability. They compare the tax payable with profits and revenues of organization to prevent the tax evasion. Suppliers require information of business to provide credit policies to the entity. For this purpose, they consider the liquidity of organization. Customer evaluates the financial position of company to assess the pricing policy. Investors and lenders had provided funds to the organization thus, they are interested in information of business for the prediction of return on investment made by them (Pratt, 2010). For this purpose, profitability is considered by them and previous trends are analyzed to make further decisions of investment.

Conclusion

From the present project report, conclusion can be drawn that financial accounting and reporting provides appropriate information to the users so they can make economic decisions. Users of financial information can be external or internal. By assessing the financial position of British Airways, it can be said that company is performing in effective manner to achieve their aims and objectives.

References

  • Kimmel, P.D.,Weygandt, J.J. and Kieso, D.E., 2010. Financial Accounting: Tools for Business Decision Making. John Wiley & Sons. 6th ed.
  • Llewellyn, S. and Milne, M.J., 2007. Accounting as codified discourse. Accounting, Auditing & Accountability Journal. 20(6). pp. 805-824.
  • Neu, D. and Graham, C., 2004. Accounting and the holocausts of modernity. Accounting, Auditing & Accountability Journal. 17(4). pp. 578-603.
  • Orens, R. and et.al., 2009. Intellectual capital disclosure, cost of finance and firm value. Management Decision. 47(10). pp. 1536-1554.
  • Overton, R. H., 2007. An Empirical Study of Financial Planning Theory and Practice. ProQues.
  • Pratt, J., 2010. Financial Accounting in an Economic Context. John Wiley & Sons.
 

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