The discussion in this area will
revolve around what accounting is, who the key parties in the financial
reporting process are, the role of generally accepted accounting principles in
the preparation of financial statements, and the regulatory environment of
financial reporting in the United States. The information being discussed here
will be found partly in Chapters 1 and 2.
This section lists options that can
be used to view responses.
Let me kick off this
discussion by asking the question: why do you think financial reporting
is important? Furthermore, elaborate a little on why financial reporting
is important to a functioning capital market?
Financial Reporting is important to companies involve the disclosure of
financial information to managment and the public (if the company is
publicly traded) about the company's performance over a specific period
of time. It reports information about a business entity, also
financial statements measure performance and communicate where a business
stands in financial terms.
Financial Reporting helps the companies to make effective decisions
concerning the company's objectives and overall strategies, for instance,
either invest in or loan money to companies.
Also, financial reporting provides vital information about the
financial health and activities of the company to its stakeholders
including its shareholders, potential investors, consumers, and
government regulators. It's a means of ensuring that the company is being
run appropriately.
References:
Harrison, Walter T., Charles Horngren, C. William Thomas. (2013).
Financial Accounting, VitalSource for DeVry University, 9th Edition.
Pearson Learning Solutions, VitalBook file.
Professor Lin: Financial reporting is important to
provide relevant and accurate data for investors and creditors. In
capital markets, accurate data is critical for investors making long-term
decisions. Financial reports allow estimation of future performance which
builds confidence and certainty.
Discussion Post:
Accounting is a performance metric for businesses
relying on reports and financial or income statements to communicate to
investors and decision-makers financial strengths or weaknesses. The important
data points are revenue and gains; and, expenses and losses. Examples
presented in the text of key parties involved are: Individuals, Investors
and Creditors, Regulatory Bodies and Non-Profit Organizations (Harrison, Horngren & Thomas, 2013).
The role of the Generally Accepted Accounting
Principles (GAAP) is to create standardized reporting and disclosure data
for companies, or entities that may invest or lend to the company.
The policies and requirements of GAAP are established by the Financial Accounting
Standards Board (FASB). The U.S. Securities Exchange Commission
(SEC) oversees GAAP practices. Standardization is important because
global businesses may have different reporting requirements. This places
extra costs on companies to create comparative reports. To address
this issue, the International Accounting Standards Board (IASB) created
International Financial Reporting Standards (IFRS) to maintain
consistency and reduce costs. One difference between the GAAP and IFRS
are that the GAAP is rules-based, while IFRS allows judgment to be used
in determining data reported. Another difference is IFRS uses
fair-value for assets, while GAAP uses historical cost for assets
(Harrison et al, 2013).
TM
Reference:
Harrison, Walter T., Horngren,
C. T., Thomas, C. (. (02/2013). Financial Accounting, VitalSource for
DeVry University, 9th Edition. [VitalSource Bookshelf Online].
Retrieved from https://devry.vitalsource.com/#/books/9781269196536/
Outside of the obvious idea of
the business keeping an accurate record of their financial transactions,
it is also important for those invested in the company to measure the
health of their investment. Financial reporting presents the standing of
the company to investors (think: board members) who tend to make
decisions for the company based on what they see. Reporting is important
for the capital market because it allows for decisions to be made in that
arena as well. Primary markets, which is included in capital markets,
cover things such as stocks and bonds. If financial reporting is not
produced, it would be extremely difficult to issue such things.
Financial reporting is
important as it helps to determine the financial health of a
company. Without financial reporting there is little evidence of
the big picture and the net worth of any business. This is
important when trying to retain loans, build the business and create
confidence in all of the shareholders and employees that work within the
organization. In a capital market, long term investments are made based
on the financial health of companies as well. So its imperative
that the clear financial picture is reported so consumers and investors
can make informed decisions.
Financial reporting is a
requirement for business entities to report the results of their fiscal
transactions. It is important because society needs transparency in order
to know the financial health of a company. Financial reporting is
vital to a capital market because capital markets enhance economic
performance. In fact, well-functioning markets can produce a number
of benefits to include: fostering stability, providing access to
financial services and developing economies by offering greater
employment opportunities.
Financial accounting is good
for accountability; annual disclosures are presented on financial
statements thereby giving an accurate picture of a company’s activities.
Global Credit Research, 20 May
2014, Moody's Investors Service: Well-functioning capital markets
important to economic growth. Retrieved from
https://www.moodys.com/research/Moodys-Well-functioning-capital-markets-important-to-economic-growth--PR_299753
Financial reports basically
give important information that the customers and employees need to know
about the business they are dealing with. Financial reports are
statements that indicates the results of operations of the business,
employees are interested in knowing these information so that when they
ask their boss for a raise they cannot accept a NO answer because the
financial reports show it can. Financial reports are statements showing
the status of the business which means if it has much debts than what
they own. Consumers as well would like to know which company will last
for long time and will want to patronize base on their status in the
economy.
Hi Bekzod, agreed. It is also
important for employees to know the company's financial standing so they
know the stability of their employment. I do think it's a bit
harder for employees to argue that their need for for a raise is due to
the financial standing of the company because most employees are unaware
of future investments and the money normally follows a budget. Normally a
set amount goes to rewards and raises.
Financial reporting’s overall objective is to provide financial
information about the reporting organization which is useful to
(potential) investors, lenders, and other creditors in decision
making. The volume of reporting is contingent upon the size or the
organization and industry. Financial reporting should provide
information about the economic resources of an enterprise; the claims to
those resources; and the effects of transactions, events, and
circumstances that cause changes in resources and claims to those
resources (Spiceland, Sepe, & Tomassini, 2016).
References
Spiceland, D., Sepe, J. F., & Tomassini, L. A. (2016). Objectives
of Financial Reporting. Retrieved from Intermediate Accounting, 4/e:
http://highered.mheducation.com/sites/0072994029/student_view0/ebook/chapter1/chbody1/objectives_of_financial_reporting.html
Actually financial statements
is very important for too many parties inside and outside . like
investors have to know the financial situation and the growth of the
company before they make and decisions . customers for example wont buy
electronic device with warranty for 2 years unless this company is in
good situation to continue for more than 2 years . financial statements
is important for government to get taxes . finally if you work for a
company that doesn't make enough return on investment . then better look
for another job
Financial reporting is
important because it holds organizations accountable to comply with
applicable regulations (in the capital market or any marketplace) and
should be developed with high quality data in order to serve the needs of
investors or other financial users. These needs can include
understanding any material risks that could impact a company’s financial
condition, operational results, or other pertinent information essential
in making an informed decision regarding whether or not to invest in a
company.
Reference
Attmore, R. H. (2013). The
Continuing Importance of Financial Reporting. Journal of Government
Financial Management, 8-10.
Michelle,
I like your definition, but can information about a company's financial
condition be used for other decisions than investing? How is fanatical
reports used in the government?
In a profit from entity the
financial statements the key parties in the financial reporting process
is managers, investors, creditors, and regulatory agencies.
Managers use this information to analysis the organizations performance
in key areas such as product line performance. The
managers would review the sales versus the cost of goods to see if
target and objectives are being met as compare to budgeted.
Investors and creditors use the financial statements to make decisions as
to whether they should invest or loan funds to the
organization.
The objective of
generally accepted accounting principles (GAAP) developed by FASB was to
reflect financial information in useful for decision making to decision
makers. The information should be relevant and faithful
representation of the entities operations. Relevant information
should have predictive, confirming value, and material so that
users may make informed decisions regarding the organization.
Faithful representation of the information means that the information
is complete, free of material error or bias, and should be
reliable.
The practice
of implementing GAAP on financial reporting ensures that
organizations utilize the same standards when producing financial
statements and are consistent in the application of these
standards.
The objective of general
purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decision about providing resources
to the entity.
The Framework 2013 identifies two fundamental qualitative characteristics
of useful financial information: relevance and faithful representation.
In order to be useful, financial information must be both relevant and
faithfully represented. Comparability, verifiability, timeliness and
understandability are identified as enhancing qualitative
characteristics.
Yes, Relevance and
reliability are core to the issuance of financial
statements. Materiality should be considered. If the information would is
to small to change the reader decision, judgments or estimates maybe
considered acceptable in the use of preparing the
statements.
"Relevance and
reliability are the two primary qualities that make accounting
information useful for decision making. Subject to constraints imposed by
cost and materiality, increased relevance and increased reliability are
the characteristics that make information a more desirable commodity—that
is, one useful in making decisions. If either of those qualities is
completely missing, the information will not be useful. Though, ideally,
the choice of an accounting alternative should produce information that
is both more reliable and more relevant, it may be necessary to sacrifice
some of one quality for a gain in another. To be relevant, information
must be timely and it must have predictive value or feedback value or
both. To be reliable, information must have representational faithfulness
and it must be verifiable and neutral. Comparability, which includes
consistency, is a secondary quality that interacts with relevance and
reliability to contribute to the usefulness of information. Two
constraints are included in the hierarchy, both primarily quantitative in
character. Information can be useful and yet be too costly to justify
providing it. To be useful and worth providing, the benefits of
information should exceed its cost. All of the qualities of information
shown are subject to a materiality threshold, and that is also shown as a
constraint."
The Generally Accepted Accounting Principles are a set of rules and
practices that the accounting profession recognizes as a general guide
for financial reporting purposes that has substantial authoritative
support. GAAP are used to prepare, present and report financial
statements for publicly traded and privately held companies, nonprofit
entities and federal and state governments in the United States.
They impacted financial reporting for U.S. corporations by setting
establishing a format for how and what corporations needed to report in
their financial statements. GAAP makes a company's financials comparable
and understandable in terms of other companies. It makes it so that
investors, creditors and others can make rational investment, credit and
other financial decisions. GAAP requires that the information contained
in them be useful and helpful to users. It also requires that
information on financial statements to be relevant, reliable, comparable
and consistent.
Kimmel. Financial Accounting, 6th Edition.Bookshelf. Web. 04 March 2013
<http://devry.vitalsource.com/books/9781118233634>
In addition to the Generally
Accepted Accounting Principles, Public Law 107-204, also known as the
Sarbanes-Oxley Act of 2002 was created to protect investors from
fraudulent accounting activities reported by corporations. In an attempt
to restore the confidence of investors, the Sarbanes-Oxley Act mandates
and focuses on the creation of “…a public-company-accounting-oversight
board, revising auditor independence rules, revising corporate governance
standards and significantly increasing the criminal penalties for
violations of securities laws” (Miller & Pashkoff, 2002).
There are many provisions
within the Sarbanes-Oxley Act. However two key provisions are:
Section 302: Corporate
Responsibility of Financial Reports: A mandate that requires senior management
to certify the accuracy of the reported financial statement.
Section 404: Management
Assessment of Internal Controls: A requirement that management and auditors establish internal controls and reporting methods on the adequacy of those
controls.
References:
Congress, 1. (2016, March 1). The Library of
Congress. Retrieved from Browse Public Laws:
http://thomas.loc.gov/home/LegislativeData.php?&n=PublicLaws&c=107
Miller, R. I., & Pashkoff, P. H. (2002, October
1). Regulations Under the Sarbanes-Oxley Act. Retrieved from
Journal of Accounting :
http://www.journalofaccountancy.com/issues/2002/oct/regulationsunderthesarbanesoxleyact.html
Thank you for your posts on regulatory environments.
The information made me look for other examples of regulatory
environments affect on companies. In addition to compliance and
providing accurate information for decision-makers, regulations can shape
the manner in which a company conducts and reports its business
transactions.
A recent study on earning management compares
reporting standards between the Generally Accepted Accounting Principles
(GAAP) and the International Financial Reporting Standards (IFRS).
The study examines the differences and the impact on real versus accrual
earnings management. The GAAP has more stringent reporting requirements
relying on real earnings management and IFRS uses accrual management. The
focus of the study is the impact regulatory environments have in shaping
whether or not companies report accrual or real earnings (Evans, Houston,
Peters & Pratt, 2015).
TM
Reference:
Evans, M. E., Houston, R. W.,
Peters, M. F., & Pratt, J. H. (2015). Reporting regulatory environments
and earning management: U.S. and non-U.S. firms using U.S. GAAP or IFRS. The
Accounting Review,90(5), 1969-1994. DOI: 10.2308/accr-5108
Great find, Let's elaborate a
little on the difference between IFRS and US GAAP. Also, what's the
current plan with regard to convergence of US GAAP and IFRS?
The difference between IFRS and US GAAP can be explained under
different levels from financial reporting, characteristics of accounting
information,elements of financial statement,recognition and measurement
basic assumptions, principles and constraints. Below are differences at
the level of the objective of financial reporting.
US GAAP
To provide information
useful for investment and credit decisions.
To provide information
useful for predicting the amount, timing, and uncertainty of future
cash flows to the business.
To provide information
about economic resources, claims against those resources,and changes
in both
IFRS
Provide information about
the financial position, performance and changes in financial
position of an entity that is useful to a wide range of users in
making economic decisions.
Users are present &
potential investors, employees, lenders, suppliers & other trade
creditors, customers, governments & their agencies & the
general public.
Addition to the discussion on
the differences and the future, the International Financial Reporting
Standards (IFRS) are used globally in approximately 110 countries. The
Key differences between IFRS and Generally Accepted Accounting Procedures
(GAAP) are that GAAP is ‘rules-based’ and IFRS is ‘principles-based’.
Each standard reports differently for Intangibles, Inventory Costs and
Write Downs (Nguyen, 2016).
Intangibles (copyright,
trademarks…) are calculated at fair value under GAAP, while assets are only
counted in IFRS if there is measured reliability and economic gain.
Inventory costs under IFRS does not allow the accounting practice
of “Last In, First Out” (LIFO) as a method of valuing assets based
on the idea the last assets produced or acquired are used, transacted or
disposed first. The GAAP allows LIFO and First In, First Out
(FIFO). This is one of the areas where similar practices are needed
because of additional costs in recalculating. Finally, Write downs under
IFRS can be reversed, while the GAAP does not allow reversal (Nguyen,
2016).
Since 2002 under the Norwalk
Agreement, efforts to converge the IFRS and GAAP have been
underway. The International Accounting Standards Board (IASB) and
Financial Accounting Standards Board (FASB) have been working with
various regional and governmental entities to standardize both. The
agreement included milestones to be met by 2008. Based on the progress of
negotiations by 2007, the SEC no longer required non-U.S. companies
located in the U.S. to modify their IFRS reports to GAAP standards, if
the non-U.S. companies were compliant with IASB standards. As of
2013, negotiations continue on areas of provisioning (Convergence between
IFRS and U.S. GAAP, 2016).
The International Financial Reporting Standards (IFRS)
is an accounting standard used in more than 110 countries has some significant
differences from the U.S. Generally Accepted Accounting Principles
(GAAP).
The treatment of acquired intangible assets helps illustrate why IFRS is considered to be based
off of if the asset will have a
future economic benefit and has measured reliability. Acquired intangible assets under U.S. GAAP are
recognized at fair value.
The IFRS does not allow LIFO method for accounting
inventory cost. Under GAAP either LIFO or FIFO can be used.
IFRS allows that if inventory is written down, the
write down can be reversed for future periods only if certain criteria
are met. With the GAAP, once inventory is written down there are no
reversal
Nguyen, J. (2016). What are some of the key differences
between IFRS and U.S. GAAP? Retrieved from Investopedia:
http://www.investopedia.com/ask/answers/09/ifrs-gaap.asp
International Financial Reporting Standards (IFRS) are accounting rules
and guidelines governing the reporting of different types of accounting
transactions and events in financial statements. IFRS is important
because it provides backbone for integrity and trust in the financial
markets. IFRS were established in order to have a common accounting
language, so business and accounts can be understood from company and
country to country.
IFRS is considered more of a "principles based" accounting
standard in contrast to U.S. GAAP which is considered more "rules
based." By being more "principles based", IFRS, arguably,
represents and captures the economics of a transaction better than U.S.
GAAP. Some differences are:
Intangibles: The treatment of acquired intangible assets helps
illustrate why IFRS is considered more "principles based."
Acquired intangible assets under U.S. GAAP are recognized at fair value,
while under IFRS, it is only recognized if the asset will have a future
economic benefit and has measured reliability.
Inventory Costs: Under IFRS, the last-in, first-out (LIFO) method
for accounting for inventory costs is not allowed. Under U.S. GAAP,
either LIFO or first-in, first-out (FIFO) inventory estimates can be
used. The move to a single method of inventory costing could lead to
enhanced comparability between countries, and remove the need for
analysts to adjust LIFO inventories in their comparison analysis.
Write Downs: Under IFRS, if inventory is written down, the write
down can be reversed in future periods if specific criteria are met.
Under U.S. GAAP, once inventory has been written down, any reversal is
prohibited.
Financial reporting
communicates information about the financial condition and operational
results of a company both public or private, not-for-profit organization,
or state or local government.
The financial
position of an organization is reported with is on the balance sheet and
the statement of net position as well as the results of the operations
which reports the statement of revenue, expenses and changes in net
position, statement of comprehensive income etc. as well as disclosures.
GAAP is grounded on
proven concepts, objectives, standards and settlements that have evolved
over time to guide how financial statements are prepared and
presented. GAAP principles are recognitions, measurement,
presentation, and disclosure.
References
About GAAP. (2016). Retrieved from Accounting Foundation:
http://www.accountingfoundation.org/cs/ContentServer?c=Page&pagename=Foundation%2FPage%2FFAFBridgePage&cid=1176164538898#section_2
In addition to what you have
stated her another major difference is the fact that IFRS does not
consider losses, gains or comprehensive income and in reference to the
objectives of the financial statements, IFRS does not dial down
information to tailor it to businesses and non business entities, while
GAAP distinguishes between the objectives for business entities and non
business entities. I think both are important specifically IFRS on an
international level.
In February
2016 the IASB released their changes in disclosure in leasing
standards. IFRS 16 Leases was a major revision in the way companies
represent leases in the financial statements. The prior standard
made it difficult for people to see an accurate reflection of the
organization lease obligations. Per Accounting Today “Listed
companies using IFRS or U.S. GAAP are estimated to have approxoimately
$3.3 trillion of lease commitments, over 85 percent of which do not
appear on their balance sheets. Leases to date have been categorized as
either "finance leases" (which are reported on the balance
sheet) or "operating leases" (which are disclosed only in the
notes to the financial statements).” This did not give an accurate
picture for investor comparison and required readers of the statement to
calculate off balance sheet obligations. With the adoption of IFRS
16 all leases to be reported on an organization’s balance sheet as an
assets and corresponding liability.
Also in
February, FASB released its standard of reporting for leases. Based
on an article in Accounting today the standard is “Under the new
guidance, a lessee will be required to recognize assets and liabilities
for leases with lease terms of more than 12 months.”
Cohn,. (2016). FASB Releases
Lease Accounting Standard. Accounting Today News. Retrieved 4
March 2016, from
http://www.accountingtoday.com/news/audit-accounting/fasb-releases-lease-accounting-standard-77301-1.html
Cohn,. (2016). IASB
Releases Lease Accounting Standard. Accounting Today News.
Retrieved 4 March 2016, from
http://www.accountingtoday.com/news/audit-accounting/iasb-releases-lease-accounting-standard-76939-1.html
In the same trend,the FASB Interpretation No. 48, also known as FIN 48,
addresses the problem of uncertainty in recording the benefits of a tax
position on financial statements. The interpretation promotes consistency
in handling uncertain tax positions that might be affected by future IRS
decisions, which can increase or decrease assets or liabilities.
Uncertainty for a company that relies on payment of rent for cash flow
and valuation of assets might be whether tenants will pay rent and if
property remains fully leased. Uncertainty affects determinations of the
value of your company’s tangible assets, such as property or equipment.
Future liabilities and credits affect the valuation of company assets.
Adopting accounting standards for uncertainty, some of which are required
by the IRS, helps resolve some of these issues. For instance, FIN 48
instructs companies to use a two-step process to determine whether the
IRS is more likely than not to rule favorably on the company’s tax
position and how much financial benefit the company is likely to receive.
Companies can use forecasting to predict and measure the impact of
uncertainty. Some companies use forecasting to factor in the future
impact of uncertainties, such as the economy, government policy changes,
population shifts and the cost of materials. An auditor can review
financial statements and assess the information provided, including
recognition and disclosure of uncertainty.
If I may elaborate further on internal controls, the Sarbanes-Oxley Act enhanced financial reporting
integrity by replacing self-regulation and mandating auditor independence
requirements. Auditors must examine financial statements and
express an opinion that conveys reasonable assurance as to the truth and
fairness of those statements.[1]
An unqualified opinion is an independent auditor's judgment
that a company's financial records and statements are fairly and
appropriately presented, and in accordance with Generally Accepted
Accounting Principles (GAAP).[2]
[1] Paulson, Henry. 17 May 2007. The key test of
accurate financial reporting is trust. Financial Times
Management.
GAAP is set of rules or guide lines that are followed Globally. Although
Many Developed countries are either following them or Creating their own
Guideline based on GAAP. Gaap is generally the guidelines or Procedure
for recording financial statement such as company's reconciliation
statement which shows the actual cash in hand or in the bank statement
would show otherwise. it is not a law but companies are to Use GAAP
to make their Financial Statements. It shows the actual Standard of the
company. GAAP provide Information that is useful to investors ,leader or
other that provide resources to a company or non-profit organization. The
record of Asset, Liabilities, Revenues and expenses done in GAAP give the
picture what investors , creditor want to see to make decision. US public
markets are required to file financial reports with the Securities and
Exchange Commision (SEC)or state regulatory agency that follow
GAAP.Preparing a finance statement in compliance with GAAP
establishes greater accountability and transparency between a goverment
and its citizens ,investor ,creditors and oversight bodies.
Yes, the GAAP is a set of
guidelines that accountants and financiers use to prepare, present, and
report the statements and numbers for everyone. My mother is an
Accountant and she goes by these rules all the time. They can be
different for certain countries but overall they are generally accepted
by everyone because they work well and are easy to understand under our
confusing tax codes.
Generally Accepted Accounting Principles (GAAP) refers
to a specific set of guidelines that have been established to help
publicly-traded companies create their financial statements.
Publicly-traded companies are companies that have made stock in their
organization available for sale to the public. GAAP has 10 basic
accounting principles. They are:
Economic Entity
Assumption: It
means that any activities of a business must be kept separate from
the activities of the business owner.
Monetary Unit Assumption: It means that only
activities that can be expressed in dollar amounts can be included
in accounting records.
Time Period Assumption: It means that
business activities can be reported in distinct time intervals.
These intervals may be in weeks, months, quarters, or in a fiscal
year. Whatever the time period is, it must be identified in the
financial statement dates.
Cost Principle: Refers to the historical
cost of an item that is reported on the financial statements.
Historical cost is the amount of money that was paid for an item
when purchased and is not changed to account for inflation.
Full Disclosure
Principle: It means that all
information that is relative to the business be reported either in
the content of the financial statements or in the notes to the
financial statements.
Going Concern Principle: Refers to the
intent of a business to continue operations into the foreseeable
future and not to liquidate the business.
Matching Principle: Refers to the
manner in which a business reports income and expenses. This
principle requires that businesses use the accrual form of
accounting and match business income to business expenses in a given
time period. For example, a sales expense should be recorded in the
same accounting period that sales income was made.
Revenue Recognition
Principle: It addresses the
manner in which revenue, or income, is recognized. This standard
requires that revenue be reported on the income statement in the
period in which it is earned.
Materiality: Refers to the
measure of importance of a misstatement in accounting records. For
example, if the price of an asset is understated by $10.00, will
that misstatement have enough effect on the financial statements to
matter? This is a gray area in accounting standards that requires
professional judgment to be used.
Conservatism: Conservatism is the
principle that calls for potential expenses and liabilities to be
recognized immediately if you are unsure whether they will actually
occur or not, but potential revenue not to be recognized until it is
actually received.
GAAP are imposed on companies so that
investors have a minimum level of consistency in the financial statements
they use when analyzing companies for investment purposes. GAAP cover
such things as revenue recognition, balance sheet item classification and
outstanding share measurements. Companies are expected to follow GAAP
rules when reporting their financial data via financial statements. If a
financial statement is not prepared using GAAP principles, be very wary!
The
purpose of financial reporting is to provide the information to the
public, government, and employees as to how much money is being made or
lack thereof. It is important that this information is shared because it
stops things such as fraud, and irresponsibility. It also informs people
who invest in your business how the money that they gave is being spent
and if it is reaping any profit. Financial reporting is important to a
functioning organization because it primarily handles long term
investments. If no accurate financial reporting is made it can
make it difficult to persuade more investors and or keep the ones a
company already has.
To go along with that,
financial reporting provides valuable information to the stakeholders of
the organizations. Can you give examples of informational needs of
certain organizations, i.e. publicly traded companies, private equity
firm, the federal government, etc.
I didn't know the answer to
this but when I looked it up it seems this information makes sense:
1.Suppliers
and trade creditors are interested in information that will help them
determine whether the amounts owing to them will be paid on time.
2.Lenders – want
information that will enable them to decide whether their loans will be
paid when due, and whether or not to issue new loans to the entity.
3.Investors
– who supply risk capital in the form of funding, this group are
concerned with the risk inherent in, and the return provided by their
investments
4.Customers
will be interested in the continuance of the entity, especially if they
depend on it themselves.
5.Employees
– wish to know about the stability and profitability of their employers.
This may give them confidence about their jobs and could be used to
discuss salary and conditions of employment.
6.The Government and government agencies are
interested in the allocation of resources and the activities of the
entities in general.
7.The General public may be affected by an
entity in a number of different ways, especially how an entity may
contribute to the local economy.
Sir, a great example of
why publicly traded companies must have appropriate financial reporting
is the gray fall of GM motors back in 2008. The federal government has a
vested interest in financial stability of such a large company as
it can affect the economy and ultimately turn to the government for a
bail out. Stakeholders also need to know so they can make wise investment
decisions.
For publicly traded companies
annual reports are
important. This report includes the company’s audited annual
financial statements and a discussion of the company’s business results.
Private equity firms include cash flow statement, statement of assets
and liabilities, and investments. Government financial reports
include budget and actual.
However, reporting for private
companies is not as frequent as it is for public companies. Public
companies report on a quarterly basis whereas private companies on an
annual basis. Still, accounting is an important function and
businesses must disclose relevant information on their financial
statements. This information is necessary in order for stakeholders
to make informed business decisions for the welfare of the company.
For example:
·Government entities need financial statements to ascertain the
propriety and accuracy of taxes and other duties declared and paid by a
company.
·Vendors, who extend a
line of credit to a business, require financial statements to
assess the creditworthiness of the business.
Source: Boundless. “Uses of Financial
Reports.” Boundless Accounting. Boundless, 21 Jul. 2015.
Retrieved 06 Mar. 2016 from https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/introduction-to-accounting-1/what-is-accounting-17/uses-of-financial-reports-112-6832/
An example would be a non
profit. while its not support by government funds, organizations that
provide grants or give big donations need to be able to see if funds were
allocated properly.
The Financial Reporting Environment
is a private entity but has to go through the U.S. Securities and
Exchanges Commission for an approval. The two most important
criterias of the Financial Reporting Process is Relevance and Reliability
which has to be use on time before it loses its value. The Role of GAAP
allow companies to report transactions and to compare financial
statements among companies.
Financial reporting is
important for the company to understand how well it is doing. With
this information they can make decisions such as investments or reducing
if needed. Financial reporting also keeps companies accountable to
shareholders.
I think the
Accounting Coach gives the best definition of GAAP, which is
an acronym for generally accepted accounting principles. In the U.S.
that mean the basic accounting principles and guidelines such as the cost principle, matching principle, full disclosure, etc.,the detailed standards and other
rules issued by the Financial Accounting Standards Board (FASB) and its
predecessor the Accounting Principles Board, and generally accepted
industry practices.
At the conceptually level,
IFRS is considered more of a "principles based" accounting
standard in contrast to U.S. GAAP which is considered more "rules
based." By being more "principles based", IFRS, arguably,
represents and captures the economics of a transaction better than U.S.
GAAP. Some of differences between the two accounting frameworks are
highlighted below:
Intangibles
Acquired intangible assets under U.S. GAAP are recognized at fair value,
while under IFRS, it is only recognized if the asset will have a future
economic benefit and has measured reliability. Intangible assets are
things like R&D and advertising costs.
Inventory Costs
Under IFRS, the last-in, first-out (LIFO) method for accounting
for inventory costs is not allowed. Under U.S. GAAP, either LIFO
or first-in, first-out (FIFO) inventory estimates can be used.
Under IFRS, if inventory is
written down, the write down can be reversed in future periods if
specific criteria are met. Under U.S. GAAP, once inventory has been
written down, any reversal is prohibited.
Many of the world’s capital
markets now require IFRS, or some form thereof, for financial statements
of public-interest entities. The remaining major capital markets without
an IFRS mandate are:
•
The US, with no current plans to change
•
Japan, where voluntary adoption is allowed, but no mandatory transition
date has been established
•
India, where regulatory authorities have made public statements about the
intention to adopt from 2016-2017
•
China, which intends to fully converge at some undefined future date
To further my explanation on
financial reporting, one set of applicable standards (which include
specific rules and applications) that publicly traded companies are
required to use to develop their financial statements is the Generally
Accepted Accounting Principles (GAAP). The GAAP, generated by the
Financial Accounting Standards Board, set presidents over the way
companies develop their financial statements for consistency and accuracy
purposes. The GAAP also assists investors with comparing the financial
statements of various companies and helps them to make decision regarding
the potential growth of a company for investment purposes.
References
What are Generally Accepted
Accounting Principles. (2016, March 4). Retrieved from Investopedia: http://www.investopedia.com/terms/g/gaap.asp
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