Financial Issues and Challenges in Corporations
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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 business.
Comparability: It is the one of the big characteristics which can help users to identify similarities and differences among events and conditions. It is the notion that consistency permits valid comparisons between different periods. Financial statements must include information in such a way that can compare the position of the current year with the previous years as well as compare the position and performance with other enterprises. The measurement and display of transactions and events require to be carried out in a consistence manner for comparisons. The purpose of this concept may be the changes in the policies of the enterprises (Venugopal, 2006). The type of accounting style should be same of all the entities according to standards for easy comparisons. There must be sufficient flexibilities in the financial statement for making changes for comparisons. They also require some consistency in the accounting standards to make them easy for comparisons. They must provide some accurate and fair information in the financial statements (Wessels, 2000).
Verifiability: Verifiability of the financial statements provides the base for accurate comparisons. It includes the audit factors. Auditing is the process of examination and evaluation of the financial report of an organization by experts which are called auditors. There may be internal audit and external audit. Auditors can analyze the activities related to company's operations. It provides the verifiability for the final reports. The verified statements provide the accurate and reliable data of organizations (Anderson, Sweeney and Williams, 2011). If companies use the verified information they can provide the exact monetary data to their users for making effective decisions regarding investment. Enterprises cannot change or modify the information once presented so they should prepare some accurate statements. Managers can verify financial statement by continuous review and evaluation of accounting department of the firms. There should not be mathematical errors in the final reports they should check by using new technologies of accounting. Organization structure of the accounts department should be very effective which can enter check the accuracy of the transactions (Boyu, 2011).
Timeliness: It means that information is available to users early enough to allow its use in the decision making process. Company should provide the required information periodic basis to their external user so they can use it on time. Many companies submit financial statement information on annual basis as well as quarterly basis. The accurate, verified and comparable information can drop their value and meaningless if there are not presented on time. It also affects the reliability and availability of the financial information within the user of information. It can affect the reputation of the organizations. It may raise questions for prepares, auditors, standard setters and regulators about their reliability and purpose of the reporting. Timeliness concept also affects the efficiency and effectiveness of decision makers because of late provided information. Company must provide all relative information on right time (Cardoza and Fornés, 2011).
Understandability: Decision makers must understand the financial information in context to take effective decisions. It is the user specific quality because users will differ in their ability to interpret data in efficient manner. The general purpose of the financial reporting is to provide data to those who can use this information for their decision making regarding economic activities. They should prepare information in the most understandable manner without sacrificing reliability or relevance of the statements. Many a time it is not possible to simplify the complex data, so they should prepare this kind of data in complex way for maintains reliability of the economical statements. They should try to make simple the possible data for better understanding. If company add some new data in their financial reports than they should clarify it in the notes. Accountant must use the better way to interpret the financial information in simple way (Dale, 2010).
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Financial statements are the very useful documents of the business which includes quantitative information. Presence of four characteristics verifiable, timeliness, comparative and understandable is essential for users of these statements. This report helps in understanding the International accounting standards for preparation and presentation of the financial statements according to IASB. It provides the detail knowledge regarding importance of economic techniques in the business enterprises. It will provide the knowledge of qualitative characteristics and their implication effect for the decision makers of the business. This study provides useful information to various decisions makers so that they can fulfill their financial objectives.
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