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Statements Are Prepared By Organizations

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Question:

Discuss About The Statements Are Prepared By Organizations?

 

Answer:

Introducation

The financial statements that are prepared by the organizations have certain quality that makes it useful for the users. It is important that while preparation of the statements the management of the company, keep these points in mind to make sure that the statements are clear and price. Two of these qualities are faithful representation and relevance.

Faithful representation implies that the management of the company should prepare the statements in such manner that it reflects the true state of affair of the business. The people who are given the responsibility of preparation of the statements must apply proper judgment before undertaking the same. They should reflect all the details based on what actually happened and how is it represented. All the material facts related to the company must be accurately disclosed in the statements of the company. All the necessary disclosures in case of any deviations must be given in the books of the account of the company. They should make it useful for the people who take their decisions based on the overall accuracy of these financial statements. It should be representative of the facts of the company. There are three characteristics of faithful representation that are: It should be complete and all the details must be valid and properly represented.  There should be fairness in the preparation of the same and the management must keep a neutral approach. It should be free from errors; there should not be any mistakes in the overall statements that the management provides (Alexander, 2016).

Relevancy refers to the character that all the details that are present in the financial statements must be relevant and must relate to the period for which the statement is being prepared. Relevance will influence the overall decisions of the management. It is important that the decisions made by the organization must be coordinated with the present economic conditions. If any information that affects the overall materiality of the company, is not disclosed in the financial statements, than those results are not relevant. All the information and details that might affect the profitability and financial performance of the company and can influence the overall decision of the management must be included. The information that reflects all the details related to the company will be relevant.

 


If we observe closely, both the characters are very important for judging overall viability of the company. The management should practice both. However if we need to choose one such feature that is more important, in that case relevance will be the most important trait in the preparation of the financial statements. It is important that the records of the company must be relevant and must be related to the period for which they are prepared. If the company fulfils the need of relevance than it will automatically cover the requirements of faithful representation. It is important that both must be practiced in the organization. Presentation of relevant information with utmost faithfulness is what makes the financial statements valid and true. However, if one has to be given preference over the other than I think that relevance of the details is a more important criterion (Burke & Clark, 2016).

Given the overall framework of the accounting standards sometimes it may be difficult for the accounting process to achieve the concept of faithful representation. However, the overall idea is to present the data to be best of one’s ability, with outmost clarity, perfection and without any biasness. Therefore, that is possible in case of the given accounting framework, because maintenance of the necessary diligence in the preparation of the accounts is in the hands of the management. The accounting standards require the management of the company, to make certain assumptions, and to treat accounts differently. However whenever the management of the company is indulging in any kind of assumptions than proper disclosures about the same must be given. By giving the necessary disclosures, the details are fairly represented and the users of the statements are able to understand in case there is any deviation from the required standards. In this way, the management of the company can make sure that the accounts of the company are prepared in such a manner that all the details given there in must be relevant and must be faithfully represented (Chariri, 2017).

Historical cost was the traditional costing method that was followed by the companies, in which the assets that were present on the balance sheet of the company were judged based on the total original cost that they were previously acquired. It is a very old method and in the present days, there have been many alternatives in lieu of this method. Traditional historical cost methods have a lot of disadvantages that are associated with it  - it assumes that there is a constant purchasing power, most of the results are not accurate given that is assumes that the price level is not changing. The results based on the historical cost methods are not relevant because it does not consider changes in the overall current level of prices. There is a problem in adding the assets together that are brought at different times by the company. It often leads to overvaluation of the assets because of which the overall profit of the company might increase. Because of all these disadvantages, the companies are no considering this method for valuation of the assets, and are looking for alternatives that help in better and more accurate valuation. The few normative alternatives to Historical cost are –

 

Current purchasing power accounting (CCPA) 

In this method, the adjustments are done at the end of the accounting period. Before the unadjusted profits are distributed by, the company based on the accounting standards and then necessary adjustments are done to reflect the current cost. The main advantage is that the data is available is used and then necessary amendments are done to ensure that the current position is reflected by the accounts at the end (Dichev, 2017).

Continuously contemporary accounting (CoCoA)

In this method, the assets are valued at their net selling prices by the companies. The balance sheet is the primary statements that show the current cost of the company’s net assets, it helps in abolition of the overall historical costs. One method of valuation is followed for all the assets; hence, it reduces a lot of work on part of the management. Since the valuation is done based on the current price, it helps in abolition of the associated historical costs, and reflects the true position

 

Current cost accounting (CCA) 

This method is based on the current cost of accounting and does not consider the historical costs of the assets. It differentiates the overall profit that the company earns that is different from the holding gain. Thus helps in better interpretation and analysis of the current position of the company’s financial statements and accounts.

Of all the three methods, the methods of current cost accounting has been most successful in abolition of the historical cost methods, because in this case the accounts are being valued on the current costs and the historical costs are not there in the picture. It is successful because it is providing data that is accurate that is based on the current economies of scale that is more relevant than any other information that is provided by the other methods of accounting. Historical cost fails to present the current costs that keep on fluctuating and hence the profit might be misinterpreted. However, this method helps in interpretation of the current levels of accounting that show cases the accurate profit of the company that is based on the economies of scale (Guragai, Hunt, Neri, & Taylor, 2017).

The conceptual framework in accounting provides the basic characteristics objectives and standards that are required for formulation of the accounting procedures and preparation of the financial statements. It provides the methods by which the financial events can be recognized in the system of accounting. It helps the perpetrators of the financial statements to generate such useful information that will help in providing such useful information, which will be useful to the users of the financial statements. These information will be clear, prices and will reflects the properties of completeness and accuracy. By following the standards that are provided by these conceptual framework policies, the companies can help in presenting their statements free from any errors that will display the true state of affairs of the business (Kew & Stredwick, 2017).

The two advantages of financial conceptual framework are –

  • The conceptual framework helps in providing a basis of accounting, by setting an issuing of the accounting standards that are provided by accounting institutions and bodies that consists of experts. Along with marinating the common language of accounting for all the organization, these rule setting bodies often produces random standards that are suite for specific needs. It helps in determination and dissemination of important accounting information. By setting these standards, they help in providing a basis of comparison among different organization. By which the investors can compare important financial information to understand which company is more financially strong, providing them with the best results. With the help of these standards, companies can easily solve any emerging issues by referring to these basic principles. They can also take expert advices on the same, and the people who are given the responsibility of preparation of these statements must be having great knowledge about these standards.
  • The other advantage is that it provides confidence to the users of the financial statements. When they know that these statements are prepared based on the important accounting standards, they get a confidence about the relevance of this information. Since the investors of the company are making their decisions based on these financial statements, they give the companies a chance to increase customer loyalty and improve investor’s confidence. The users can often go through the basic principles to check the overall validity of the accounts of the company. Understanding the overall conceptual framework of accounting, helps the users in better interpretation and analysis of the financial statements and take their decision accordingly(Maynard, 2017).

The two limitations of the conceptual framework are –

Difficulty in Interpretation- These standards are set up by expert bodies that have thorough knowledge in accounting, but there are chances that people who use these statements may find it very difficult to interpret and use. They will often need expert guidance that will help them in analyzing the same. And also different companies follow different rules, it is not the same for all so that’s where the main issue related with the comparability strikes up, and both the users and perpetrators find it difficult to interpret the results and analyses the same when it comes to intra firm and inter firm analysis (Daff, 2017).

 


Difficult to set up – These standards takes a lot of time and analyses before being set up and it is a very long process. With the proposal of the draft and the final release the time involve this very long, so that is one major disadvantage that the overall process of formation of the standards is a very complex process and requires a lot of analysis and also monetary expenses.

On a personal front, I feel that these criticisms are correct. Because the overall process of formulation of these standards requires a lot of time and since the people who uses them does not that expert knowledge of accounting, often find it difficult to analyze. That major disadvantage is associated with this conceptual framework. It is important that same accounting language must be followed in the organizations throughout the world, so that it gets easy for the interested parties to indulge in interfere and intra firm comparisons. The standards must be easy to understand, interpret and apply. So necessary changes must be done, so that the companies find them easy to adopt and the investors find them easy to analyse and interpret (Minnis & Sutherland, 2017).

 

References

Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education , 71 (4), 411-431.

Burke, J., & Clark, C. (2016). The business case for integrated reporting: Insights from leading practitioners, regulators, and academics. Business Horizons , 59 (3), 273-283.

Chariri, A. (2017). FINANCIAL REPORTING PRACTICE AS A RITUAL: UNDERSTANDING ACCOUNTING WITHIN INSTITUTIONAL FRAMEWORK. Journal of Economics, Business and Accountancy , 14 (1).

Daff, L. (2017). Accountants and their Intra-Organisational Communication. Retrieved 2 10, 2017, from https://confidentcommunicators.files.wordpress.com/2014/07/executive-summary-of-doctorate.pdf

Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business Research , 47 (6), 617-632.

Guragai, B., Hunt, N., Neri, M., & Taylor, E. (2017). Accounting Information Systems and Ethics Research: Review, Synthesis, and the Future. Journal of Information Systems: Summer 2017 , 31 (2), 65-81.

Kew, J., & Stredwick, J. (2017). Business Environment: Managing in a Strategic Context (second ed.). London: Chartered Institute of Personnel and Development.

Maynard, J. (2017). Financial accounting reporting and analysis (second ed.). United Kingdom: Oxford University Press.

Minnis, M., & Sutherland, A. (2017). Financial Statements as Monitoring Mechanism: Evidence from small Commercial loans. Journal Of Accounting Research , 55 (1), 197-233.

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