Financial accounting refers to the process of recording, summarizing and reporting the accounting transactions so held by an entity from its business activities. All such transactions are the then represented under the financial statements, i.e. Balance Sheet, Income Statement and Cash Flow Statement so as to present a true and fair view of the accounting transactions and also to ensure that such transactions are easily understood by the internal and external users of the financial statements. Important to note, that, all the transactions are reported under the relevant accounting standards relating GAAP or IFRS.
As for the financial reporting, it refers to the way the companies show their financial performance to the investors, creditors and other interested parties by preparing and presentation of the financial statements. The concept of the financial reporting includes:
- Preparation of the financial statements, i.e. Balance Sheet, Income Statement and Cash Flow Statement.
- Providing supplementary notes to the financial statements. These notes includes disclosures that provide further details about the information summarized in the financial statements and allow the users to improve their assessments of the amount, timing and uncertainty of the estimates reported in the financial statements.
- Filing of quarterly and annual financial reports with the government agencies as Security and Exchange Commission in USA
Multiple users of the financial statements and their multiple uses of the financial statements:
As already discussed that the financial statements serve multiple users who must have a reasonable knowledge of business, accounting literature and economic activities and who are willing to study the information diligently." Important to note that the financial information not just serves only the shareholders rather it has multiple users and their varied interests to serve and the same is discussed below:
a) Internal Users:
The very first users of the financial statements are the executives, owners and employees themselves and each has its own reason to analyze the financial statements.
i) Owners and Executives:
The owners and executives of the entity use the financial statements so as to compare the real performance with the relevant benchmarks and then using such results so as to frame out the business decision making. Thus, the owners and executives perform an in-depth financial analysis of the financial statements so as to know the areas of concerns within the entity. For Instance, if consistent increase in operating expenses is the reason for decline in net profit margins, the management can take measures to control the increase in operating expenses. Apart from self-evaluation, the owners and executives also use their financial statements so as to compare their performance with their core competitors and to assess the changes in their market share.
ii) Employees:
Employees of the organization also account for the primary internal users of the financial statements and they use the financial statements for making collective bargaining agreements which relates to wage hikes, promotions etc.
b) External Users:
The next users of the financial statements are the external users which include the investors/prospective investors, government, creditors
i) Investors/ Prospective Investors:
Financial statements carry a great significance for the investors as well as probable investors as their investment decision in the entity are highly dependent on the financial performance of the organization as displayed in the financial statements. Thus, both the investors and prospective investors, look for dividend payout, net profit margin trends, stock splits, changes in management and many other factors in the financial statements before framing their investment decisions.
ii) Creditors and Debt-holders:
Outside creditors and debenture-holders are also very keen users of the financial statements, primarily the profit margins and debt/equity position of the company as their interest and principal payments are highly dependent on such factors. For Instance, at times of low profit margins or high debt equity ratio, the creditors might not be ready to advance loans to the company.
iii) Government:
Government bodies, especially the taxation authorities will carefully look for the financial statements of the company. For Instance, Taxation authorities are more interested in ascertaining s how much tax the company has paid and if such amount has been decided as per ethical accounting and taxation norms. For Instance, when in doubt, the taxation authorities might analyze the operating expenses and net profit margins.
Legal and Regulatory Influence on the financial statements and implication over the user:
Regulatory authorities are the government agencies that have the legal authority to enforce compliance with the financial reporting standards. These authorities have a significant influence on the financial statements as when they deem fit, they might change the accounting rules so as to ensure that ethical, true and fair financial statements are presented to the shareholders and other users of the financial statements. The legal and regulatory changes could be in any form as changes in the federal laws, changes in judicial interpretation of existing laws, political needs etc For Instance, the most popular legal and regulatory influence was made with the introduction of Sarbanes Oxley act in 2002 in USA after the accounting scandal of Enron shook the investor’s confidence.
All such measures taken by the regulatory bodies have a positive implications over the users of the financial statements as they understand that all such measures are being taken in their varied interests and to keep their confidence upheld in the functioning of the financial markets and related organizations.
How different laws/regulations are dealt with by accounting and reporting standards?
The very objective of financial reporting of providing true and fair view of the financial statements could not be achieved alone with the regulations imposed by authorities. The success of the changes in accounting regulations is ensured by the two accounting standards, i.e. US GAAP and IFRS. Both of the accounting standards Both IFRS and GAAP have a laid framework from their respective standard setting body. Thus, any change in accounting pr taxation rules brought in by regulatory authorities are incorporated by the accounting standard setting boards so as to ensure that the organizations provide updated financial information as per new rules set by regulatory authorities.
Ratio Analysis
In order to analyze the financial performance of the company, we shall be conducting the ratio analysis of the company. Below provided are the financial ratios for the company during 2012:
i) Liquidity Ratios:
Also known as Pure Balance Sheet Ratios, liquidity ratios indicate the short term solvency of the company, i.e. if the company will be able to honor its short term obligations. In other words, it indicates the current working capital position of the company. Below discussed are the two popular liquidity ratios:
ii) Profitability Ratios:
These ratios carry great significance is it indicates the level of profit margins being earned by the company from its business activities. Profitability ratios have a significant capacity to influence the investor’s investment decision. Below discussed are the profitability ratios of the company:
iii) Solvency Ratios:
These ratios indicate the proportion of debt/equity in the capital structure of the company which leads to conclusion relating to long term solvency of the company, i.e. if the company will be able to honor its long term obligations. Below discussed is the gearing ratio of the company:
iv) Efficiency Ratios:
Also known as Asset Management Ratios, these ratios indicate the efficiency of the management to generate revenue for the company using assets of the company. Below discussed is the efficiency ratio of the company, i.e. Stock Turnover Ratio.
Introduction: Consolidated Financial Statement
Consolidated Financial Statements are sort of combined presentation of financial information of both the parent company and its subsidiary. Under Consolidated Balance Sheet, Assets, liabilities, equities and other operating accounts of both the parent company and subsidiary company are combined and are thus shown as consolidated financial statements. Similarly, under Consolidated Profit and Loss Statement, the revenue and other items are combined so as to show the group performance. In simple words, these financial statements combine the financial statements of separate legal entities which is controlled by a parent or holding company into one set of financial statements. In this way, it helps the readers to understand the overall financial health of entire group of companies.
Necessity of preparing consolidated financial statement:
The primary requirement of the preparation of the consolidated financial statements is to provide financial summary of the entire group of companies controlled by the parent company. In this way, the readers could get easy access to all the financial statements of each and every subsidiary along with the parent company.
Benefits of the consolidated financial statements:
Overview of the entire group of companies:
One of the primary benefits of the consolidated financial statements is that it provides complete financial information of the entire group of companies. In this way, the shareholders do not have to read financial statements of the parent company and the subsidiaries separately and thus, simplicity and usefulness is ensured in the consolidated financial statements.
Less Paperwork:
Another benefit of the consolidated financial statements is relating to reduced amount of paperwork by creation of such statements. Thus, when a holding company owns multiple subsidiaries, each of them along with the holding company has their own financial statements. Thus, if a parent company owns 7 subsidiaries, the readers of the financial statements have to go through 32 financial statements. In this way, a consolidated financial statement ensures less paperwork as even if parent company owns 7 subsidiaries, the consolidated financial statement will have only 3 financial statements where all the financial information of the subsidiaries is clubbed along with the parent company.
Balance:
Consolidated financial statements also send a diversification to the outside parties. For Instance, it might be possible that the parent company has ended in losses but due to good performance of its subsidiaries, the group has earned sustainable net profits. In this way, the consolidated financial statements were able to balance the poor performance of the parent company and showed the outside parties as how through diversification the company remained profitable.
Simplified:
Consolidated financial statements also eliminate complexity from the financial statements. For instance, when a subsidiary sells its product to another subsidiary owned by the parent company, an intercompany transaction is created. Consolidated financial statements eliminate these transactions and simplify the financial statements.
Works Cited:
Investopedia. (n.d.). Investopedia. Retrieved June 2nd, 2014, from Sarbanes-Oxley Act Of 2002 - SOX: http://www.investopedia.com/terms/s/sarbanesoxleyact.asp
Averkamp, H. (n.d.). What is financial reporting? Retrieved June 2, 2014, from Accounting-coach.com: http://www.accountingcoach.com/blog/what-is-financial-reporting
Users of Financial Statements. (n.d.). Retrieved June 2, 2014, from http://finance.mapsofworld.com/financial-report/statement/users.html
Averkamp, H. (n.d.). What are consolidated financial statements? Retrieved June 2, 2014, from http://www.accountingcoach.com/blog/consolidated-financial-statements
Lacoma, T. (n.d.). The Advantages of Consolidating Financial Statements. Retrieved June 2, 2014, from http://www.ehow.com/info_8793204_advantages-consolidating-financial-statements.html
Macintosh, K. A. (n.d.). What Are the Benefits of Consolidated Financial Statem. Retrieved June 2, 2014, from http://www.ehow.com/info_8589837_benefits-consolidated-financial-statements.html
