Financial Statements Are Important For Investors And Creditors Accounting Essay

Financial Statements Are Important For Investors And Creditors story EssayYou atomic number 18 required to discuss and comment on the above averment with reference to academic books, papers, and new(prenominal) published sources that you bind read. distribute all the interest in your responseCritically evaluate monetary statements in terms of its importance, reli top executive and relevancy to the cay put onrs. receptionAs stated by Atrill McLaney, the pecuniary statements objective is to abide a shooting of the financial position and execution of instrument of a product line ( Atrill McLaney, 2008).The Financial Accounts of a company describe the performance of the company in financial terms. They be summary of the extensive activities of a business designed to provide honest and accurate pictures to stakeholders (Woelfel, 1994).In todays world, the financial accounts of a company allow for be of interest to wide variety of users called stakeholders (DL MBA Ma terial, 2003).As discussed in DL MBA material, just about of stakeholder of a company idler be owners, alterers, investment analysts, managers, employees, customers, suppliers, competitors and g everywherenment agencies. The following briefly discuss peculiaritys of financial reports which would be interested to each society (DL MBA Material, 2003).Owners The shareholders of companys are crowning(prenominal) owners. The shareholders invest their money into company hence they are concern with profit index, dividend and future prospects of the company. Their main concern is reliability of information useable to them to decide their future expectations or course of actions (DL MBA Material, 2003).Lenders They are the financial institutions who total money to a company for its regular operation or business expansions. They perform detailed analysis of company accounts and deem conclusiveness to lend money. It helps them to understand the financial leverage of the company by analysing the different leverage ratios like debt-to-equity ratio etc. They determine the fixed summations of the company in club to cover up any eventuality. They decide the repayment ability of companies towards borrowings (DL MBA Material, 2003).Investment Analyst They are risk-appetite traders, individual investors, and financial institution flavour for business opportunity to invest money into a company. They often use companys account to evaluate the future growth and profitability of a business. ane of their main concerns is growth potential of the company their share footing performance in stock market (DL MBA Material, 2003).Managers A companies managers intention is to analyse the financial accounting and find the direction of the efforts being put to achieve corporal objectives. They usually determine the company performance based on exhaustive internal accounts. Their individual performances get judged by the producing good accounting figures (DL MBA Material, 2003).Employee They would be concern about future of company stability and would be smell at accounts from company profitability, growth, long term business and truthfulness of information (DL MBA Material, 2003).Customers- They often sees companys account to determine the strength of the potential vendor to pander their commitments (DL MBA Material, 2003).Supplier- They often sees companys accounts to determine the credit facilities payment terms (DL MBA Material, 2003).Competitor- will be interested to see the accounts to gain any advantage which they can give use of (DL MBA Material, 2003).Government agencies- Tax authority will take close set(predicate) nip into a companys account to identify any discrepancy in the account by overstating or under standing profits. and then the key criteria would be to check accuracy, verifiability truthfulness (DL MBA Material, 2003).The different users of accounts got different motive to look at it and they got different requirement li ke fairness, truthfulness, performance, repayment capacity, financial leverage, liquid and hard currency flow of a company.Question 2 Review the shortcomings of HCA lesson when harms are rising and explain why financial reports under the HCA are subject to some major limitations (e.g. inventory is under assessd, the dispraise charge to the income statement is understated, balance sheet entertains are understated, and periodic comparisons are invalidated). receiptThe historical be accounting is a convention in which asset values are based on the actual amount compensable for the assets with no ostentation adjustments. The historical woo conventions mention that the value of assets should be accounted on their acquisition cost (Atrill McLaney, 2008).It does non take into account inflation though there are certain adjustments like depreciation, depletion and impairments (www.money terms.co.uk, 2010). It relies on an surmisal that the purchasing cause of money is consta nt through out and does not counter switch with time. Under historical cost approach, the inventories are reported in balance sheet at cost. However, there may be drop-off in literalisable value of the inventories due to obsolescence, deterioration or saleable price changes hence historical cost approach does not account for this change (Hawawini Viallet 2007).It is often said that the weighing assets at their incumbent value would provide a more truthful picture of the financial position of a company and would be more meaningful to wide range of audiences for decision making. But at the same time it has got reliability problem (Atrill McLaney, 2008).With swipe in price, HCA will not be able to capture the change in valuation of underlying assets as it records the value of assets as historical cost. Hence, increase in the value of assets will not be reflected in a company balance sheet. Due to this the balance sheet will not present the true financial position. As a result, in the time of high inflation, profits will be overstated and revenue liability will increase.Again with price fall, similar problem will be observed but this time real asset value will be less than the historical cost hence overstating the assets on the balance sheet undermining the profits the tax liability will decrease.The depreciation adds more complication to the problem. The cost of assets full generally spread out over a number of years of its usability life time at the price paid at the execution of a dealings. The depreciation affects the carrying value of the asset. HCA does not consider the real value and hence depreciating original value does not show true picture.Question 3 Why has the HCA bewilder survived in spite of its limitations in times of inflation?ResponseThe HCA ideal is traditional accounting model and there are many reasons for its survivals. It is straightforward, naive and reliable. There are certain limitation with net market value, depreciation , price rise fall and inflations but at the same time other accounting systems largely faces concerns around reliability, appropriateness, quality truthfulness of information (Johnson, 2005).As per Johnson, the historical costs though not fair but much(prenominal) more reliable. Hence many instances, the importance is given to trade-off in the midst of historical costing and other advanced fair value practices in much larger perspective (Johnson, 2005).The foundation of HCA is a real transaction which has happened and the money has been paid for that transaction. Hence the cost value is a real not fictitious and has its root in that transaction. It is not about figure somewhat imaginary or hypothetical cost. The main advantage of employ historical cost accounting is simplicity and certainty. The other advantage is it gives managers ability to forecast future operational costs. Hence in spite, many experts indicate that the fairness of the method is far from real value, it st ill continue to require the accounting world.Question 4 Discuss the features of current income and value models (e.g. present-day(prenominal) Purchasing Power Accounting (CPPA) and Replacement Cost Accounting (RCA) models) that have been suggested to replace or operate in tandem with the HCA convention.ResponseAs per Nobes, current purchasing king or general purchasing queen accounting systems are based on historical cost accounts modify with general price index numbers (Nobes, 1992). In case of current purchasing power accounting, the original purchasing costs are right by correction factor based on some general index like retail price index. The corrected purchase cost is then used to calculate the balance value of the assets in order to record in the balance sheet for that year. Hence it represents more practical(prenominal) value for non-monetary assets.Ahmed argues that the replacement cost accounting measures replacement cost in units of money. He argues that the replac ement cost income is equal to the difference between established revenues and their corresponding replacement costs in units of general purchasing power (Riahi-Belkaoui, 1996). As per Drummon stickler, the replacement cost is the amount of cash or cash equivalent that would be needed presently to acquire equivalent assets which can provide same function as the original asset. The method consists of estimating the cost of a new asset as argued by Christina (Drummon stickler, 1983). The important characteristic of replacement cost accounting is to capture the effects of changing prices and ultimate changing value of the items.The key feature of both techniques is to capture the want or gain in the value of non-monetary items such that the effects of inflation or deflation can be captured in the balance sheet to make it more accurate.Question 5 Critically evaluate the virtues and defects of these alternate(a) models.ResponseThe main characteristic of the alternative models like cu rrent purchasing power accounting or replacement cost accounting is a weapon to capture the loss or gain in the value of non-monetary items on the current valuation basis. It helps to record assets on the balance sheet with realistic values. The balance sheet can portrait true picture of financial position of an organisation (DL MBA Material, 2003). It can accommodate the effects of inflation or deflation make financial statement more economically relevant.The main drawback of the alternative models is changes in the prices are captured but these are not based on actual real transaction. These models are complicated and values are subjective. It may happen that the general Consumer Price index or inflation has foregone up but the impacts on assets have been reverse or not that significant. In such case, the resultant value will be erroneous. Hence they lack in reliability.