Financial Accounting: Definition, Purpose, and Significance

Annual Reports and Stakeholder Analysis

Financial accounting is the process of designing and operating an information system for collecting, measuring and recording business transactions, and summarising and communicating the results of these transactions to users to facilitate the making of financial/economic decisions. The first part of this definition, relating to collecting and recording business transactions, is called double-entry bookkeeping. The purposes of financial accounting are to record and control business transactions, maintain accuracy in recording, meet the requirements of the law, present final financial statements and other financial reports to the owners of the enterprise, and facilitate the efficient allocation of resources.

The final financial statements of companies are often referred to as published financial statements, and include a comprehensive income statement and a statement of financial position. These are contained in a document called the annual report and financial statements (or annual report and accounts). The functions of annual reports are related to society’s beliefs about the objective(s) of business enterprises. Users include investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies, and the public. Each of these will have particular information needs.

The contents of company financial statements are governed by the regulatory framework. This comprises the Companies Acts, London Stock Exchange regulations, and accounting standards. The latter includes IASs and IFRSs as issued by the IASC/IASB.

1. Identify five stakeholder groups who typically use such information.

2. What specific information would each group use?

3. State one reason why each specific stakeholder group would use particular information disclosed in the financial statements. 

4.State examples of where you can identify the key concepts/ideas discussed in the notes being applied in the financial statements, as reported, e.g. qualitative characteristics of financial statements; regulatory framework issues.