a) A financial statement is a statement that records the financial and travel of a company. Therefore, there had a lot of objectives in producing financial statements. According to the conceptual framework, the objectives of producing financial statements is to provide financial information about the reporting entity that is useful to the external user which is investors, lenders and other creditors to make a decision about providing the resources to the entity. (general purpose financial report and general purpose financial reporting). The information provided in the financial statement also shows how a company’s financial performance is bringing the profits or loss that can be caused by the increased of debt. In Addition, with the financial statements, the company and any other users can make a differentiated information from last year with the current year and also the user can make comparisons with another companies and therefore the
Second, to provide information about cash flow which can evaluate the financial level of the company primarily involving cash. Through the cash flow company and other users can assess how the company uses the money. This is because in the cash flows there is a record of how much money is spent and received as a result. Through the cash flow statement, the company can find out where the money is used and for what purpose the money is used. For example, increase in the sales will make the increase in the profit of business and shows the developments in the business.
Third, to see how the financial performance and how the company manage their financial and the business. The financial statement is used to records all activity that has been used to see how the impact to the society. Without good accounting information, misallocation of capital would occur and result in inefficient production and shortages. Information for which provide a financial performance can help improve a financial performance and can help to improve management performance, assist in solving problems that cause the company to lose and impact the company.
b) According to the Framework, ‘qualitative characteristics are attributes that make the information provided in financial statements useful to users’. The Framework identifies four principle qualitative characteristics which are Understandability, Relevance, Reliability and lastly Comparability.
The First qualitative characteristics are Understandability. Understandability defined that all information in the financial statement must be able to understand. Not only for the company uses but also for another user. For those who want to know about how the business in the company grows, they will look at the information provided by the company. They will evaluate how the company finances and how the company grows. If the users do not understand the content written, the company cannot blame them. This is because such thing happened for mistakes and negligence in recording and making information. Definitely, an entity cannot do anything about users and it upon the user to have a basic level of understanding about the financial statement. However, an entity can present the information in such manner that it helps in understanding which is do a proper explanation of financial statements to be more understandable.
Second, Relevance. Information must be relevant when it influences the economic decisions of users by evaluating past, present and future or confirming, or correcting, their past evaluations. Through relevant information users can estimate, evaluate and improve financial and budget for a company and for other things of interest to the user, example likely dividend or wages rise. In addition, relevant information can help in ensuring that the business is in line with planning and improvement. According to the Framework, relevant information should have predictive value or confirmatory value. Information that has the predictive value helps the user to evaluate the past, present or future events. Most of the information is taken from last year, it is intended to plan the financial stage in the coming year. Information with confirmatory value is helping users to confirm or corrects their past evaluation and assessments. The relevance of information is affected by its nature and materiality. Information is materiality if its omission or misstatement. An example, in the accounts of a limited liability company, is the amount of remuneration for example salaries and other rewards paid to the directors of the company. The assessment of an item as material or immaterial may affect its treatment in the accounts it is not only the value of the item but the context is important.
Third characteristics are reliability. Information must have the quality of reliability when it is free from material error, free from deliberately or systematic bias which is classified under neutrality and can be depended upon by users to represent faithfully that which its either purports to represent or could reasonably be expected to represent. According to the framework, the UK equivalent, The ASB’s statement of Principle for Financial Reporting, states that a material error can cause a false and error in financial statement and it does not reliable anymore. If something happens in making decision or judgement, therefore, there is not neutral anymore if there any bias.
Lastly, comparability. Comparability means that the financial statement can be compared of an entity depends form the changes and performance in the financial position. Usually, a company will make a comparison between last year and current year based on financial position and use that information to make a future budget. This is required for economic decision making, such as deciding whether to buy, sell or retain a holding of equity shares in the entity.
(c) Many different groups have a direct and indirect relationship with a modern business corporation. These include suppliers of capital which is from both equity and loan capital; suppliers of other resources; employees; customers; and government agencies. Usually, in accounting, the users of the financial statements are divided into two which is internal and external. Internal user interested parties who need the accounting information to make a decision such as a plan, organization and run the business. External users are those users which are indirectly in the organisation or which are contact with the organisation but from outside. There had a lot of potential users of a company’s financial statements. Which is managers of a company, shareholders of the company, trade contacts which is suppliers and customers, employees, government and other agencies and so on.
First, managers of the company. Managers are appointed by the company’s owners to supervise the day-to-day activities of the company. The managers also use this financial statement to see whether the business is profitable, what are the financial resources of the business and is the company achieve the target. As the internal users of financial information, the managers won’t expect and they are not limited to information in the financial statements and have a full access that not only to public information but also internal information of an organization. Their information not only on the basis of financial accounting but also of managerial accounting. Managers usually many and varied targets and often complex. Management needs to focus on two main objectives which are profitability and liquidity. An important role of managers is to make the reality existing in the organization compatible with the needs and expectations of other users. They need information about company’s financial situation as it currently and as is expected to be in the future to make sure the business is operations efficiently and make an effective decision. For example, If the profit and Loss account showing that the previous year expenses are more than revenue, so by checking it or by analysing it, a manager can know how many expenses are incurred and how to reduce it. So that the managers can decide what to do in the future by watching the previous Profit and Loss account and etc.
Second, employees of the company. The employee has the right to know information about the company’s financial situations because their future careers and the size of wages and salaries are depending on it. If the company loses, the employee will be exposed to consequences. The company will reduce the salary or fired employees because they want to revive their company and to reduce costs. Regarding professional opportunities, this information knowledge can stimulate the workers to follow different training programs, other than those offers through the organization, to continue their studies, aspect that will have beneficial influence over the future business of the entity. The interest of the employees is oriented on information beyond the field of financial accounting, such as the incidence over the working conditions of production programme, the general evolution of the orders, the forecasted measures for improvement, transform, replace the equipment or the methods of production and exploitation.
Third, Investors and known as shareholders. Shareholders use financial position to see how the business operations and how profitable the business. They not only look at the past financial performance but also to view about likely future performance. Providers of capital are concerned, primarily, of the risk of investment they have been committed or intends to engage and profitability which it produces or will produce. Investors need information to access the stewardship of management. For example, in safeguarding the entity’s resources and using them properly, efficiently and profitably. The investor also takes a decision about management especially in assessing the need for new management. The functions of the financial statement are to make sure that they invest in the right company and make them profitable if they invest in the company. If a financial statement in a given year shows a decline or even some company losses for almost a year, the investor can withdraw their investment and move to another company. Future profit may be estimated from the target company’s past performance. An investor can take a decision about their investment or potential investment. For example, Investor can decide whether to hold, buy, or sell and assessing the ability to pay the dividends. An investor can increase the dividend percentage if the company raised a profit
Fourth, Suppliers. The supplier is an entity that supplies goods and services to another organization. This entity is part of the supply chain in the business, which may provide the bulk of the value contained within its products. Suppliers use the financial statement to decide whether to sell the entity to the company or not. Suppliers will determine whether the company can pay on time or not. They can make us as a longer-term stability because the company is a major customer to them.
Lastly, the lender for example bank and other institutions. The lender is an individual, a public group, a private group or financial institutions that make funds available to another with the expectation that the funds will be repaid. Lenders use Financial statement because they want to determine whether their loans and interest will be paid on time and to decide whether to lend on what terms and also to know financial soundness before giving credit. This is often referred to as a loan creditor group. It would include the long, medium and short-term lenders of money.” A short-term loan creditor will immediately consider cash flow and the Cash Flow Statement based on FRS 1, will be of particular interest here. The banks make up much of this grouping and would also have an interest in the (NRV) Net Realisable Value of the assets.