Introduction to Business Economics
Business economics is the field of application of economic theory and quantitative method to analyze the business. It includes study about relationships of firms with labor, capital and markets. The basic purpose of economics is to providing practical information to people who apply economics in their trade. This study is related to financial issues and challenges faced by corporations. It describes the way of presentation of financial statement according to IASB and the importance of these statements for various users. It represents some qualitative characteristics which are useful for business.
Seven users of financial statements:
The International Accounting Standard Board (IASB) issues some International Accounting Standard (IASs) which business must follow for preparation and presentation of financial statement (Anderson, Sweeney and Williams, 2011). According to this institution there are seven users of financial statements who need economical statements which are as follows.
Investors: Investors are the owners of the business and it comprises both existing and potential shareholders. They require information to consider whether to invest or disinvest in the particular enterprise. There are two type of profit for the share holders first dividends and the second is gain from increasing in share price. So investors need more reliable and accurate financial data of the organizations to find out the position of the enterprises (Boyu, 2011).
Lenders: Lender is the groups which provide money to the business in the form of debt. There are banks, other institutions and individuals who give funds to the company for getting some interest on the money. They require financial information to find out the answer of the question that will they get their money back? They require finding out the position of the cash in the business for getting knowledge regarding interest payment (Cardoza and Fornés, 2011).
Employees: They also need monetary data to know about future growth of labor and increments in wages and other compensations. Employees are the very important group for any business. Many companies produce a separate report for employees to providing information regarding their growth and development opportunities in the enterprises. This group is interested in loner term financial viability of the firms as well as current financial stability of the units (Dale, 2010).
Suppliers: This is the group of trade creditors which play very important role in the supply of material to business. Suppliers decide the level of working capital of the business. They require financial information to know about the stability of the enterprises in term of cash flows. They want to know that firms ability to meet its short term liabilities. They also need data to making decision regarding continuous supply of the material on the credit bases (Dowling, 2009).
Customers: They also require financial statements to find out short and longer term financial stability of the business to supply high quality goods with sound after sales service. They will be interested in pricing policy of the business and element of the product to ensure the quality. Customers are the king of the market; they compare products with the other available product to find out the best product for them (Dunn, 2012).
Government agencies: According to company act, they must published financial statement in the local news paper. Government requires the information for taxation. It needs data for making decisions regarding economic policy for the country. It can use financial information to find out the overall performance of the country. Govt. also interested to know the effect of the enterprises on the environment of the country (Eisler, 2013).
Public: Business is part of the society. They have some responsibilities for the public of the country. Public will be interested in the enterprises information to find out the employment opportunities and business development. They also need data to deciding the affect of firms on the environment of the place. International public also demand data to generate the investment opportunities in the foreign market (Goldsby and et.al., 2006).
Requirements of IAS, "presentation of financial statements":
To ensure comparability both with the entity's financial statement of previous years and with the financial statements of other entities, Companies must prepare and present financial statements at the end of every financial year (Greenberg, Greenberg and Antonucci, 2008). Followings are the main reports which business must prepare for their users who need the financial information regarding the entity.
- Statement of financial position at the end of period (Balance sheet).
- Statement of profit and loss and other comprehensive income at the end of period (Income statement or Trading and Profit/loss account).
- Statement of changes in equity for the period.
- Statement of cash flows at the end of year.
- Notes, which includes significant accounting policies and other explanatory information.
The all financial statements must present fair information according to IASB. The assets and liabilities are present in order of liquidity because liquidity presentation provides more relevant and reliable information than current/non current presentation. General purpose of the financial statements is to provide the position, performance and cash flow of an entity that is useful for a wide range of users in the market to making economic decisions (Hoover, 2009).
Enterprise should prepare the statements fairly to present information, including accounting policies, in manner that provides reliable, relevant, understandable and comparable. An entity shall make an explicit and unreserved statement of such compliance in the notes if entity's financial statements comply with IFRSs. They should maintain the standard level of preparation and presentation of final reports according to the IASs for make it useful for everyone (Hornby, Gammie and Wall, 2001).
Management should prepare the economic statement on going concern basis. They are responsible persons of the organizations. They also use the accrual basis of accounting at the time of presentation of the final statements except cash flow information. Item in the financial statements shall be retained from one period to next period, it called consistency of presentation. There must be consistency in the presentation of the economical reports (jain and Khanna, 2008).
Rule of materiality and aggregation provide the way of classification of material class. Each item class of similar nature will be presented separately in the reports. The main objective of this rule is to identify the effect of every item separately. Offsetting provide the way of classification of balance sheet and income statement. It says that asset and liabilities, and income and expenses will not be offset. It will be separately presented in the relevant documents. The standard says that information of the financial statements must be comparative (Jones, 2004).
According to IAS an entity cannot rectify inappropriate accounting policies so they should present accurate and fair information in the economical report. The standard requires companies to prepare and present financial statements in such way which provides full accurate and reliable information to their users. It set the standards of format for the various financial reports which businesses can follow. The whole preparation and reporting standards should be matched with the IASs because it can affect the decisions of the users of various countries of the world (Pianos, 2012).
The main and very important purpose of financial reporting is to disclose useful information to users for evaluating and making decisions about allocation of the economic resources. There are four basic qualitative characteristics that enhance the usefulness of the information that is relevant and faithfully represented. Enterprises should recognize the all qualitative characteristics for making financial statements more reliable and useful for decision makers (Reid, 2012). Followings are the four qualitative characteristics and their application in the