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What is Financial Accounting?

Question:

What is the Financial Accounting ?

Financial accounting helps to keep the financial transactions in more organised format. It not only consists the recording of transitions, it also includes the preparation of financial statements and publishing such information in standard formats. Annual reports of a company are prepared based on such statements and hence, these statements play an essential role in annual reports. The annual report is important for every company as business communicates to all its stakeholders through its annual reports. Annual reports present the financial soundness of a company. It compares the past business performance of the company with the current year performance. Future goals and long term plans of a company are also highlighted in the annual report of the company (Loughran, 2011). There are certain rules of accounting which need to be followed while recording as well as presenting the transaction. These rules are emerged to provide uniformity in the format of financial reporting so that the manipulation of accounts can be restricted. In order to read the whole report one need to be familiar with the accounting terms and have knowledge of the subject. Annual reports serve the purpose of all the stakeholders of a business. Every company is expected to follow the accounting concepts and guidelines issued by the authorities like GAAP, IFRS and IASB while keeping and publishing their business transactions (Lunt, 2009).

This project involves the study of Annual Report of Ramsay Health Ltd for 2016.  Ramsay Health is a listed company which is listed on the Australian Securities Exchange (ASX). In addition to this, the methodology and concepts followed by the Ramsay Healthcare Ltd. While preparing, its annual reports has been discussed in detail.

RHC limited covers the Weight of 0.93% with a Market cap of 14,123,500,000. RHC Ltd (Ramsay Health Ltd., 2016) established by the Paul Ramsay and which is now covered in the top five privately hospital operators in the Globe. RHC has a main goal on providing the quality and safety of highest standards. The philosophy, beliefs or ideology “People Caring for People” and its operating its business accordingly (Ramsay Health Ltd., 2016).

Ramsay Health Care provides a wide range of health care needs which includes the highly complex surgery to normal surgery procedures, rehabilitation and psychiatric care. Ramsay health has approximately 25,000 beds, and employs more than 60,000 workforces in five countries and tackle about 3 million sick person or sufferer each year. At Present, RHC is an international hospital circle or group operating and owning a complete range of healthcare facilities covering Australia, Malaysia, Indonesia, France and the United Kingdom. Despite the differences of these marketplaces, the Company has manifest that it has the capability, flexibility, management expertise, and cultural awareness to operate and manage successfully within an extensive range of international healthcare structure.  Ramsay Health in private hospital operations is a market leader in both Australia and France (Ramsay Health Ltd., 2016).

Latest in History of Ramsay: - In 2015 there was approval by shareholders in the merger of Ramsay Santé and Générale de Santé was confirmed between both the groups.  In December 2015, the newly merged organization take receipt of a further nine healthcare entity in Lille bringing the total figure of hospitals in the group to 110 and the total digit of facilities which includes treatment centres to 124

Importance of Annual Reports in Financial Accounting

Solution:

  • Going Concern: This is the basic concept which states that, while preparing the accounts, the business will continue to operate, work and function in will go on the same way for the foreseeable future (Minimum in the coming 12 months). In other way, the entity will not liquidate or scale down its operations in a material way.

The Going Concern Concept of Accounting is important as it presents the fair position to shareholders about the financial soundness and stability of the business, which will influence price of price, as the financial statements are prepared and executed on the assumption that the entity will continue to exist for a longer period (Needles, 2008).

Example: Depreciation is calculated by RHC Ltd., on a Straight-Line basis which is calculated over the assumed useful life of the asset on Building and integral plant – 40 to 60 Years. Using the going concern assumption, it is presumed that the business will carry on with its operations and so the asset will generate economic interest throughout its full years in use.

  • Accruals basis of accounting: In this concept, transactions are recorded in them as the revenues or expenses as they are earned or incurred in the financial year to which they belong, not as the cash is paid or received (Warren, Reeve and Duchac, 2011).

The accrual concept in accounting presents a better image of a company's or earnings profits during the financial period. The reason is that the income statement or Profit and loss account incorporated under the accrual basis, will help to report and summarized the revenues which are actually earned  by the company in an accounting period also the expenses incurred to earn those revenues (Albrecht and Stice, 2010).

Example: In Schedule of Trade and Other Payable, accrued expenses are being used to escalate the accuracy, correctness and perfection of the financial statements, so that the expenses get more closely associates with those revenues which they are related. Similarly, there were various provisions and receivable which shows that revenue earned must be harmonized, against the expenditure incurred in earning it.

  • Substance over form: This concept follows that the financial statements and notes of accounts of the business should display the realities and actual facts of accounting transactions. Conversely, the information (whether monetary or non-monetary) appeared in the financial statements should not entirely fulfil the legal requirements in which they appear and perform.

Example: In Cash Flow Statement, there is a Repayment of finance lease (under cash flow from Financing Activates) which means the asset is acquired by the RHC Ltd. under lease agreement without the shifting of legal title or agreement at the end of the lease period. Such a lease may, in subject matter, be called as a finance lease if for instance the lease term is significantly for complete useful tenure of the asset or the lease agreement authorize the lessee to purchase or buy the asset at the termination of the lease term at a very nominal or minimal price and it is very probably that such alternative will be exercised or executed by the lessee in the given state of affairs (Warren, Reeve and Duchac, 2011).

Measurement is the procedure of defining the monetary amounts or figures at which the financial statements elements are to be acknowledged and carried on the statement of financial position and income statement (Albrecht, Stice and Stice, 2007). This includes the selection or choosing of the particular method of measurement. There are a number of problems which can be identified in the present AASB/IASB Standards and conceptual framework. These are as follows: -

  1. a) The Following areas are either not put on the top place or not placed in enough details:-
  • Quantification i.e. Measurement ;
  • Financial administration or performance;
  • Presentation and Revelation;
  • De-identification; and
  • The reporting organizations.
  1. b) It does not clarify that information and statistics needed to encounter the objective/goals of financial reporting encompasses information which can be handed-down to help assess stewardship management and the organisation’s resources;
  2. c) It does not explain the rules of judgement and concreteness over form in financial describe;
  3. d) It does not clarify that an excessive elevation of measurement uncertainty can construct financial information and facts less relevant or material;
  4. e) It does not clarify that important determination on, for example, identification and measurement, which are guided to consider the nature of the conclusive information about both financial and position performance;
  5. f) It does not provide clearer terminology of assets and liabilities, also more substantial guidance to sustain those terms and explanation (Kimmel, Weygandt and Kieso, 2010).
  1. g) Another aspect of the present Conceptual Framework are obselete and unsuccessful to reflect the present reasoning of the IASB. Example, the present Conceptual Framework explains that a liability an or asset should be recognised and considered only if it is foreseeable and there will be a inflow or outflow of economic and wealth resources. However, IASB has identified some situations or cases that recognising of asset or a liability will help to deliver fruitful information even when there is a flow of economic and wealth resources which are not probable (Gabriel, 2010).

The Audited Balance sheet of RHC Limited for the financial year 2015-2016, is prepared and presented in such a manner that above problems can be resolved and deleted, so that there is compliance with the Revised Conceptual Framework of International Accounting Standard Board (IASB). For Example: -

  1. The Disclosure of Asset is made in such a way it shows that asset can produce the economic benefits and that of Liabilities means resulting in a transfer of economic benefit.
  2. If there could be important uncertainty about whether a distinct type of asset or liability prevail, the Annual Report deal with that uncertainty when it spread or revises a calibre on that type of asset or liability.

iii.    The Annual Report recognises upgrade to those quantification or measurements in the declaration of any changes in equity, as a shift of wealth in the middle of classes of equity claim.

  1. The Financial Statement uses the updated definition of Entity Control i.e. an organization controls an economic resource only when it has the existing ability to immediate the correct use of resource so as to secure the economic welfare that comes from it.
  2. Financial reports of Ramsay Health Care provide facts and figures about the reporting organisation’s economic resources; insist against the reporting entity and the consequences of transactions and other occurrence and conditions that convert those resources and claims (Warren, Reeve and Duchac, 2011).
  3. The terms and condition of a contract and agreement builds the rights and obligations for the organization. To reliably personify these rights and obligations, Annual report of Ramsay health care reports their economic, financial and budgetary substance and not merely their legal or judicial form. In some cases, the rights and obligations is understandable by the arrangement of the contract. In other words, a group or series of agreements, or the terms of the contract, require comprehensive analysis or inspection to indicate the validity of the rights and duties (Weygandt, Kieso, and Kimmel, 2010).

vii.    The asset, liability, income and expenses recognised providently represent the significance of the transaction from which they have entered into the financial statement. . Hence, in general, rights or obligations occurring from the identical source are scattered only if the resulting information is further useful and the benefits overshoot the costs (Stickney, Weil and Francis, 2009).

viii.    There are Key Estimates and Assumptions in Notes to Accounts to maintain the clarity and readability among the stakeholders.

Financial reports represent the organisation performance during the reporting period in words and numbers which are designed as per the requirement of the corporate law. It would be Sufficient (adequate or complete disclosure of all required information), Impartial (unprejudiced from bias) and free from error (no miscalculation, error and omissions). The Board of Directors or the Management will have the objective to increase the ultimate wealth of the shareholders with all due governmental and non-governmental compliances (Kimmel, Weygandt and Kieso, 2010).

Hence, it is required to acknowledge the description along with the explanation and quantification on the beginning of the financial position statement, supported by-

  • the representation of finalised income, or expenses; for an example, if an entity takeover an asset in exchange for consideration whether payable in cash or shows in payable, the failure to acknowledge the asset can result in providing the misleading information to the users of the financial information. In many cases, if the entity does not generate the economic benefits from the asset immediately, that result could provide a misleading representation to the users of the financial statement that financial position of the entity’s has deteriorated or gets worse or decline (Lunt, 2009).
  • If the concerned assets and liabilities are not acknowledged or recorded, then it can lead to any ‘accounting mismatch’, which does not provide clear understanding and trustworthy of the complete effect of all the transaction or other transactions by giving rise to such asset or the liability, even if the detailed disclosure or description is provided in the notes to the financial statements (Weygandt, Kieso, and Kimmel, 2010).
  • Related disclosures: depicts the complete impression which includes the entire information that are necessary for stake holders of financial statements to comprehend the extravaganza which have depicted, including all necessary explanations and descriptions. Hence, all the related disclosures are again very much significant which will enable a good amount to form part of a faithful representation of an financial statement (Stolowy and Lebas, 2006).
  • Comparability, timeliness, verifiability and understandability are the most important characteristics which are qualitative in nature and intensify the usefulness of the relevant information pertaining there to in the statement.
  • The Annual report is prepared in Comparative statements which helps to compare the financials of the entities within or outside the entities. When comparative analysis is done within the organization, it means that information provided has been compared from one financial year to another financial year. Example: In RHC Annual report, income statements for the financial year 2014, 2015 and 2016 have been compared. Comparability of information between different corporate entities enables analysis of differences and similarities between different organizations. So this is the most important feature to measure the faithfulness.
  • All the Information whether monetary or non-monetary contained in the Annual Report of RHC is Verifiable. Verifiability helps to convince stake holders about the information represents truly what it intended to represent. The financial information provided in the statements is authenticated by evidence and the independent stake holders can examine them to check whether such information is truly presented. Furthermore, information is verifiable if it can be precisely audited and the Financial of RHC is audited by E & Y.
  • The format of Annual Report of RHC Ltd. is designed with proper and concise Timeliness. It means providing information to top management who are the decision-makers in time. It shouldn't be postponed or no use for the management (Everett, Johnson and Madden, 2012).
  • The Language and Accounting used in Annual Report is as per the Law prescribed by the Australian Government which is easily understandability. It means financial information requires to be unambiguous, clear or apprehensible to stake holders with sensible information of business and economic transactions. However, it is inappropriate to remove complicated elements in sake for making the reports and statements simple or understandable.

References

Albrecht, W. A. Stice, A.K. and Stice, J. D. 2007. Financial Accounting. Mason:   Cengage Learning.

Albrecht, W., and Stice, E. 2010. Financial Accounting. Mason: Cengage Learning.

Everett, R.E., Johnson, D. R., and Madden. B. W. 2012. Financial Accounting for School Administrators. London:            R&L Education.

Gabriel, S.J. 2010. Financial Accounting. 2010. Tata McGraw-Hill Education.

(Jones, 2014)Jones, M.J. 2014. Financial Accounting. Wiley.

Kimmel, P.D., Weygandt, J.J., and Kieso, D. K. 2010. Financial Accounting: Tools for Business Decision Making. New York:      John Wiley & Sons.

Loughran, M. 2011. Financial Accounting For Dummies. John Wiley & Sons.

Lunt, H. 2009. Fundamentals of Financial Accounting. Mason: Elsevier.

Needles, B. E. 2008. Marian Powers Financial Accounting. Mason:            Cengage Learning.

Ramsay Health Ltd. 2016. [Online]. Available at:  https://www.ramsayhealth.com/common/emag/rhc/annualreport2016/pubData/source/RHC-Annual-Report-2016.pdf [Accessed on: 27 April, 2017].

Stickney, C. P., Weil, R. L., and Francis, J.2009. Financial Accounting: An Introduction to Concepts, Methods and Uses. Mason: Cengage Learning.

Stolowy, H., and Lebas, M. 2006. Financial Accounting and Reporting: A Global Perspective. Mason: Cengage Learning EMEA.

Warren, C. S., Reeve, J. M., and Duchac, J. 2011. Financial Accounting.  Mason:   Cengage Learning.

.

Weygandt, J. J., Kieso, D. E., and Kimmel, P.D. 2010. Financial Accounting: IFRS. John Wiley & Sons.

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