There are several objectives that guide the setting up of these standards. Below is brief discussion on the importance of accounting standards and especially in the New Zealand context. These include:
Accounting standards usually set the minimum level of disclosure of financial information. This ensures that all interested parties and stakeholders are adequately informed of the financial happenings in a company. Well prepared financial statements will serve all stakeholders and thus they will be able to make informed choices guided by the financial statements.
These standards remove variations that may arise in the treatment of several aspects of accounting. They also bring standardization in the presentation of financial statements. This means that financial statements can easily be understood even by non accountants
Probably the main objective of standards is that they harmonize diverse accounting policies followed by in the preparation and presentation of financial statements by different reporting enterprises. For instance, accounts prepared in different industries such as manufacturing and financial and services sector can easily be compared since they are prepared using the same standards meaning all accounting areas have been treated the same way.
Accounting standards followed consistently ensure uniformity in the preparation and presentation of financial statements. This means that accounts for a previous period can comfortably be compared to the current year’s accounts as long as the standards have been consistently applied.
Standards increase certainty in financial reporting. Accountants always have a frame of reference in the standards and can support their figures with generally accepted accounting standards. For instance an accountant will be certain on the treatment of various accounting aspects and reduce the aspect of subjective judgement in their work and thus increase stakeholder confidence in the financial statements.
The major goal of adopting accounting standards is to ensure that the qualitative aspects of accounting that include understand ability, relevance, comparability and reliability are attained.
Information provided by the Income Statement
The income statement is probably the most important financial statement, at least for its face value. Different stakeholders would want to establish the financial performance of the entity in a given period and this financial statement comes in handy to supply that information.
The income statement is comprised of the revenue part and expenditure part. Other sections show the tax paid dividends payable, and other areas of analysis. To begin with, we summarize the definition of the income statement as a statement that indicates the revenue earned and the expenses incurred in arriving at the profit or loss in the company.
In the revenue section, this statement outlines the various sources of revenue for Air New Zealand airline. It shows that the major source of revenue is the passenger income followed by cargo and mail income. This explains the core source of income to the company. Other sources of income are also included in this section.
A comparison between the current year’s revenue and the prior year’s performance indicates an increase in revenues from almost all sources with a 6% increase in passenger revenue and one percent growth in other revenues
Different users of accounting information will be interested in different areas of the income statements. Suppliers and lenders will be interested in the turnover and profitability of the company so that they can be sure that their money is safe in the company, they are also assured of prompt repayment of their loans and supplies. With a revenue position of the excess of $3.8b, these stakeholders are assured that their money is safe in the airline business.
Employees will be interested in the labour expenses and the relationship with revenue. They would want to know how much of the company’s profits go to them in forms of salaries and wages. Employees will also be interested in the stability of the company. A profitable company indicates that the company is likely to be a going concern and thus employee job stability and security is guaranteed which is the case in this company.
The general public is also a very interested party in a company. The public enjoy the services of a company and want to be assured that such a company will continue to operate in future. The profitability, stability and cash position of the company is an indicator that the company is financially sound and will therefore continue to operate in the foreseeable future thus guaranteeing the public of the continued supply of these services.
Balance Sheet
Also known as the statement of financial position, this statement provides information on the state of financial affairs at a particular point in time. It’s divided into two sections that, the assets and the liabilities sections. The assets segment is comprised of current and non current assets. The liabilities side is made of the current and non current liabilities, and the owner’s equity.
Essentially, the balance sheet provides information to several stakeholders so that they can arrive at their various decisions based on facts. Using the balance sheet, investors are able to analyse the liquidity and solvency of a company so as to make informed decisions on their investment actions using various tools of analysis such as financial ratios.
Air New Zealand appears to be in a healthy financial position. Total assets increased at almost $700m following the acquisition of a new aircrafts and refurbishment of existing ones. This of course came with an increase in liabilities resulting from the financing of these new acquisitions. Investors are therefore comfortable with these results and can bank on the strength of the company’s financial position to guarantee a good investment vehicle.
The company is also in a stable cash flow position, closing with a balance of $1.15b in cash. This has enabled the company to declare a handsome dividend to be paid to the stakeholders The balance sheet therefore provides useful information that can be employed to analyse other aspects of the company such as the solvency, gearing and return on investment using the various tools of analysis such as financial ratios.
In summary, a balance sheet only provides a snapshot of the resources of a company resources and obligations at any given time. It specifically allows an investor to recognize a company’s future earning capacity and its ability to meet debt obligations. Comparing balance sheets for two different periods can aid in understanding changes in the financial position of a company.
The major drawback of the balance sheet is that it is limited in its ability to provide a true picture since it utilizes historical values.
Cash flow Statement
A cash flow statement provides rather considerable information about the current happenings in a business beyond what is conventionally contained in the statement of comprehensive income and the statement of financial position. A cash flow statement is basically a summary of the sources and use of funds in a company and shows the contribution of each segment i.e. the operating, the investing and financing section of the statement to generate the net increase in cash flows at the end of the month.
The cash position of a company is of great interest to different stakeholders in any business. Executives would be concerned whether the cash generated by the company would be adequate to allow the company to adopt a particular expansion strategy. Shareholders would also be concerned in knowing whether the company is generating enough resources to pay dividends, while suppliers would want to know if their customers will be able to pay any debts advanced to them as a result of their cash flow position or otherwise.
Cash flows in a company also inform investors of the future growth potential of the company. Ideally, a company which is experiencing liquidity problems is not likely to remain a going concern for a long time.
Moreover, employees would want to know whether the company has the overall viability as indicated by its ability to fund its operations. This therefore explains the reasoning that cash flow in a company is quite important.
The cash position of Air New Zealand is quite stable. With a net cash balance of over $1b, the company boasts a stable cash position and is able to pay a good dividend and also meet all its current obligations despite the not so good economic environment.
The concept of depreciation
The value of assets declines with the passage of time, either due to wear and tear, obsolescence, age etc. In simple terms, the value of an asset declines at a given rate usually arrived at in accounting terms over the years. A new asset is of course more valuable than a similar aged asset. The difference arises with as a result of the depreciation suffered by the older asset. In technical terms, depreciation would be defined as a non cash expense that results to the reduction in the value of an asset as a result of wear and tear, obsolescence and / or age. Assets lose their value and usability over time and must therefore be replaced after the end of their useful lives. A depreciation expense account is therefore created and debited with the value of the depreciation. It’s assumed that this depreciation account is like a reserve of money that is set apart for sometime and will be used in the replacement of the asset.
Ordinarily, the depreciation being an expense is posted on under the establishment expenses in the statement of comprehensive income. This is because, depreciation reduces the value of an asset even though there is no money involved, in the matching concept of accounting, and all income must be matched with the corresponding expenses. Assets are used to generate income in the form of revenue; a corresponding expense must also be booked to correspond to this income in the form of depreciation.
There are several methods used in accounting to arrive at the depreciation amount of an asset. The method used in an entity depend on the entity and industry policies adopted, the nature of the assets etc. the rates of depreciation employed also depend on the nature of the asset and the expected useful life of that particular asset.
Some of the methods used in calculating include the reducing balance method, the straight line method, the sum of digits methods etc. Using the reducing balance method, the net book the net book value of the asset is multiplied by the percentage rate of depreciation to arrive at the depreciation expense for the year.
The straight line method allocates a depreciation rate based on the expected useful life of the asset. In this case, an equal expense is booked for each year until the asset is diminished. This method makes an unrealistic assumption that the value of an asset can actually diminish to zero.
References
Steward Lawrence Et al, (2007) accounting at work in business, government and society
