Business Accounts

Lecturer : Mr Jay Singh Beeharree

Rohit Joshi
Student ID:13898
Table of Contents
Table of Contents..............................................................2
Abstract...........................................................................3
Introduction......................................................................3
Qualitative Characteristics.................................................4
Relevance....................................................................................................4
Reliability.....................................................................................................6
Reliability is where the information provided is verifiable,
representationally verifiable and neutral. It is the quality of information
provided to investors or other investing parties, which allows them to
depend on information with confidence. It should be entirely free from any
errors and bias, and whatever information provided must be true. This
means it is verifiable. For example, apiece of land, which is published in
the balance sheet, its current market value will be difficult to verify and
users to rely on............................................................................................6
Representational faithfulness here means, that any form of
communication or agreement that is the case that it pretends to
represent. For instance, any description has to be represented in what
time it as happened or what is still existed.................................................6
Neutrality means that, while putting together or while initiating, the issue
here should be the relevance as well as reliability of the information. The
information cannot be preferred to favour on decision makers...................6
Another factor in reliability is completeness. Any information, which is
missing, or left out, can cause incorrect or fraudulent information, thus
leading incompleteness of its relevance.....................................................6
Comparability..............................................................................................6
It is the value of information that enables to compare investment
opportunities by comparing either single business over the period or
between numbers of businesses at the same time. It is the quality of
relationship between two or more information. This information enables
investors to identify similarities or differentiate economic phenomena’s.
Maintaining conformity with IASB helps to improve comparability..............6
Understandability........................................................................................6
Purpose of published accounts of companies......................7
Financial Statements...................................................................................7
Users of accounts........................................................................................7
Limitations of published accounts...............................................................9
Conclusion........................................................................9
Bibliography.....................................................................9

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Abstract
The objectives of financial reporting are to give useful data about
the current and potential creditors, investors and other interested
parties to allow them to make decisions, and open path for
investment. Financial statements are spreadsheets with numericals,
however task is to understand the real assets that underlie these
numbers. The purpose of assignment is to find, the importance of
qualitative characteristics in accounting from the outlook of
investors and auditors and who are the users of accounts
maintained by the corporation.

Introduction
The primary function of financial reporting is to send out
information, which is appropriate in making organisational and
profitable decisions, to any interested parties. Here, the
International Accounting Standards Board (IASB), develops and
approves the International Financial Reporting Standards, ensures
that investors and other interested parties receive accurate and
reliable reports. IASB is a privatised accounting body formed in April
2001, to succeed the International Accounting Standards
Committee. The following are primary objectives of IASB:

• To have a single set of international accounting standards, so

that it is acceptable and it can be implemented worldwide.
This in turn, will have high quality, transparent and
comparable information in financial statements and reporting
to promote world capital markets and other parties in making
vital decisions.

• To encourage organisation to use and precisely apply these

standards.

• To observe and perform the above objectives so that it can

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 meet the requirements of small and medium sized enterprises
and emerging markets, and

• To link up IASB, with National Accounting Standards and

International Financial Reporting so that premium solutions
can be provided to the investors and other interested parties.

Qualitative Characteristics
The purpose of financial reporting is to present accurate and reliable
information to investors or other interested parties. The information
provided must include qualitative characteristics so that it can be
useful for any decision-making.

Qualitative characteristics are viewed as a hierarchy of qualities, as

shown in the figure (following page). The two essential qualities are
reliability and relevance. Other qualities are comparability and
consistency.

Relevance
To formulate the decision process, the accounting information
provided to investors, creditors and other investment parties, should
possess predictive value, feedback value and timeliness. For
instance, if net income and the decision makers confirm investing
expectations about any future earnings means, then the net income
has a feedback value for its investors. This concludes that it can
come in handy while predicting future revenue generating potential,
as possibilities are re-examined. Relevant information has predictive
value; it helps decision makers make straightforward predictions
regarding the future. It also does help decision makers correct
they’re earlier forecast; hence, it has Feedback value. Without any
knowledge of past, the base of prophecy will certainly be lacking;
and without any interest in the future, the knowledge will be of no
use. To be relevant, information must be timeliness. Timeliness
means that the information must be available for decision-making
before it loses its capacity to influence decisions.

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Reliability
Reliability is where the information provided is verifiable,
representationally verifiable and neutral. It is the quality of
information provided to investors or other investing parties,
which allows them to depend on information with confidence. It
should be entirely free from any errors and bias, and whatever
information provided must be true. This means it is verifiable.
For example, apiece of land, which is published in the balance
sheet, its current market value will be difficult to verify and
users to rely on.

Representational faithfulness here means, that any form of

communication or agreement that is the case that it pretends
to represent. For instance, any description has to be
represented in what time it as happened or what is still existed.

Neutrality means that, while putting together or while initiating, the

issue here should be the relevance as well as reliability of the
information. The information cannot be preferred to favour on
decision makers.

Another factor in reliability is completeness. Any information, which

is missing, or left out, can cause incorrect or fraudulent
information, thus leading incompleteness of its relevance.

Comparability
It is the value of information that enables to compare investment
opportunities by comparing either single business over the
period or between numbers of businesses at the same time. It
is the quality of relationship between two or more information.
This information enables investors to identify similarities or
differentiate economic phenomena’s. Maintaining conformity
with IASB helps to improve comparability.

Understandability
Information provided should not be so complex that the decision
maker or users who have a thorough knowledge of business and
economic activities, and accounting, that they are not able to
understand it. For any information to be useful, there must be a link
between the decisions makers and decision they make. This is the
nature of information, which allows the user to observe its
importance.

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Purpose of published accounts of companies
Financial Statements
Accounting has been known as “the language that speaks about the
business”. The following are accounting statements and its uses:

• Income Statement

It reports whether the company has made a profit or loss over

a certain period of time. This is used to describe outcome of
company performance in summary form.

• Balance Sheet

It is snapshot of company’s financial situations at a given

period of time. It contains status of company liquidity, assets
and equity. It is useful in examining financial condition and
determining liquidity, solvency and future possibility of
business operations.

• Cash Flow

The accounting department in an organisation prepares cash

flow statements that are used to generate cash fluctuations.
These data are used to describe the company’s cash
prospects and whether they can continue operations.

Users of accounts
There are many users of published accounts:

• Investors

All the investors will be concerned about the risks and returns
if they have already invested or are willing to spent. They
need to known if the business will be able to pay dividends, so
they can decide about their investment. Every investor wants
to know about company’s growth, sales and its volume; its
profitability; investments and assets owned; share price and
business value and compare it with other competitors.

• Lenders

Financial institution and banks would want to receive

information that would help them decide whether loans and
interest will be paid when the time it is due on. Here, the key
is cash flow; assets that could be secured and appropriate
funding required in the business.

• Creditors

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 Suppliers and creditors order information, which would help
them to determine if the business will be able to pay of their
short-term debts when it is anticipated.

• Employees

Employees in the business (includes trade unions) will require

information about the stability and continuing profitability in
business. They are also interested if the company can
maintain their pension and retirement benefits. Employees
here will look forward to company’s growth and yield;
investment in business; overall employees statistics and
valuation of company’s.

• Government

The government would want to know about the company’s

liquidity and profitability so that they can judge and could
control their economies. Other government agencies such as
Inland Revenue will also like to receive information, as they
need to collect various taxes such as Value Added Tax (VAT),
Corporation Tax, and Customs and Excise and make
appropriate decisions about taxing or grants.

• Analysts

Analysts are also interested in company accounts, especially

for quoting on the stock exchange. They require very minute
details of financial and other company details so that they can
evaluate the performance and future development of the
business sector.

• Public at large

The financial accounts do provide information that is available

to public. They are interested in performance of businesses.
From the information provided, due to public opinion it could
severely cause the company to change its policies.

• Others

Financial information also helps local committees to be aware

of trends and any development in long-term plans of business
that could affect their locality.

Many businesses now publish reports to also inform

environmentalists that how the company is working to keep
the environment clean and safe.

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Limitations of published accounts
• Sometimes accounts are customized to meet the requirement
of business and its team, to support objectives and strategies.
It only focuses on responsibility rather than nature of
expenses.

• Accounts are now prepared after end of each month, and they
cannot execute same goal, verifiability as annual accounts.
This happens because doubtful debts, slow moving inventory
etc. are not recorded every month.

• Every business has its own nature and it varies tremendously.

For example, seasonal products are typically sold during the
season. Just before a season the business could show loss
because of less sales and in subsequent months could shown
high profits.

Conclusion
Financial statements report both on firm’s positional view and
operational aspect over current and past period. However, the real
value lies, that they can predict future earnings and dividends. The
ultimate goal of financial management is to maximize the stock
price. However, accounting data do influence stock prices, and to
forecast where it is heading, one needs to evaluate the accounting
information reported in the financial statements. For management
to maximize a firm’s value, it must take advantage of its strengths
and correct its weaknesses by comparing the firm’s performance
with that of other firms in the same industry and evaluating trends
in firm’s financial position over time. This enables management to
identify deficiencies and take corrective measures ultimately
leading to stock maximization.

WORD COUNT: 1575

Bibliography
Books: -

Principle of Financial Accounting

(Financial Times/ Prentice Hall; 3rd edition, 2004)

Business Accounting for Dummies

(John Wiley & Sons; 2nd Edition 2008)

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