Statement of Equity Balance - Coursework Example

Financial Statement One of the primary functions of the financial reports is for effective communication information to both outsiders in a timely and more credible manner. Financial reporting provides users with useful information when they make decisions concerning market performance (Anderson et al. 2012). According to IFRS framework, financial reporting has limitation as for complete conclusion to be made; the users have to rely on other sources. The structure gives critical characteristics of financial statements. Understandability is one of the essential parts of financial reports, which makes the information accessible and useful to the commercial users as well as affects the achievement of the key characteristics. The main qualitative characteristics of financial reports, according to IFRS framework, are relevance and reliability of the financial reports (Zeff 2014). The relevance of financial statement means the extent to which the information can assist in making decision process in predicting the financial outcome and company value. One of the issues of relevance is timelines as it influences the timelines of the decisions made by the users (Zeff 2014). Reliability, on the other hand, referred to as a faithful representation of financial statement, aptitude to precisely reflect the fundamental economic occurrence that it intends to stand for. This individuality is less the same as they are also part of the framework of the financial accounting standard board which is used in over 100 countries. The paper discusses the characteristics of financial statements before discussing different types of financial statements available (Anderson et al. 2012) All business aimed to maximum its earnings; there is a need for every business to keep a record of changes in profit of the company. Accounting can be said to mean an activity that is used in business to identify the record and communicate the economic event in an enterprise. Accounting helps in keeping track record of economic events that takes place in the company. Accountants use financial statements to help third party and other interested individuals to evaluate company performance. Financial statements are conveyed through a standardized set of reports; there are some regulatory agencies that assist in controlling what each and every financial statement contains. For accounting purposes, there are four major financial statements. The four financial statements are the final product of the financial analysis of the company (Hoyle, Schaefer & Doupnik 2014). Balance sheet The company balance sheet mostly significant in the accounting equation that is widely known as assets = capital + equity. Balance sheet explains three elements namely liabilities, owners equity and assets. The company balance sheet shows the resources that the companies have at the end of reporting period. It displays the financial condition whereas another statement reflects company operating results (Hoyle, Schaefer & Doupnik 2014).The balance sheet is used to evaluate the business ability to meet its long-term obligation and the flexibility of the firm to change to respond to new requirements (Anderson et al. 2012). Classification of elements in the balance sheet; Assets: - the assets represent property which the company or entity holds. They are of two types fixed and current assets. Fixed assets comprise mostly of immovable property, items that cannot be readily converted into cash. They include machines and equipments, cars, houses among others. Current assets, on the other hand, include items that could be easily converted into cash. They include cash at hand and cash at bank, stock among others (Anderson et al. 2012). Liability: - these are property that belongs to other people but are in possession of the company. There are of two categories which include current responsibility and long-term liability. Current liabilities are liability which can be repaid within one-year examples include bank overdraft and debtors. Long-term loans are those that their repayment period is more than one year. They include mortgages, long-term bank loans, and treasury bonds among others. Owner's equity: this is the contribution by the company owner towards the development and company start-up (Linsmeier 2011). Income Statement This is a financial statement that reports the company profitability over a specific time. Income statement is being prepared by recording the total revenue which the company has received within a given period and the total expenses that the company has gotten in the same period. The dissimilarity between the income and the operating cost gives the profit received at that particular time (Linsmeier 2011). Financial reporting standards provide guidelines on how income statements should be prepared and the steps to be followed. The items within the statement follow distinct patterns and headlines that must be used when reporting the company profitability or loss. In other areas, the statement is known as profit and loss statements, and it gives the company performance summary within a specified period (Anderson et al. 2012). The statement of retained earning and the cash flow The owner's equity statement explains the change in earned capital. The residual equity is listed on the balance sheet and is influenced by the income. The information from the statement of operations is very useful in preparation of the income statement. Cash flow statement, on the other hand, summarizes information concerning the cash inflow and outflow for a specific period. The statement provides information on the ability of the company to pay its debts. It explains sources of cash, how the money has been used, among others. The company cash movement is categorized into three and includes operating activities, investing activities adds financial activities. Information used to prepare cash flow statement is derived from beginning and end of the balance sheet (Anderson et al. 2012). Understandability and complexity The complexity in financial reporting is not something new as the debate over it. The discussion on reducing financial reporting instrument started in 2008 and resulted into IFRS 7 and IFRS 9, mechanism in the development that aim to elucidate the disclosure and the valuation of the financial instrument. And make reporting more transparent in nature (Hoyle, Schaefer & Doupnik 2014). The development of IFRS 9 has proved very critical in determining whether financial instruments should be valued at fair value cost or at amortized. Anderson et al. (2012) argues that complex financial instruments used by banks and their valuation in the market and would mean that companies are giving different reports on their financial statements. Symmetry information normally results from complex financial instruments used by various banks and companies. Relevance is frequently affected if the time second-hand for adhere to all system and giving the utmost revelation means that in order are not opportune or visible to assist in the decision-making process of the users. Understandability, on the other hand, affects if reports are too complex for the ordinary users and the output is not clear enough. Financial reliability and relevance Financial crisis are linked with the financial liquidity and credit management. Anderson et al. (2012), on the other hand, argues those financial crises are brought by valuation problem but not liquidity as assumed by most institutions. Valuation of complex financial instruments may result in information asymmetries with the system when assets were first valued at a higher price that the actual or realistic value whiled a lower price when the economy experienced financial downtown. There is a need that all financial statement is relevant and reliable in terms of asset valuation, liquidity estimation among other management factors like credit management. Fair value accounting The role of fair value accounting has brought several controversies as it was blamed for negatively contributing to the bank asset decline during the crisis. Fair value accounting is considered as the trade-off between the relevance and reliability hence help in giving much information concerning how different assets are being treated. There are instances where historical cost is considered more reliable since they mostly rely on the purchase cost of the asset during the fair valuation primarily relies on market values that are subject to changes (Hoyle, Schaefer & Doupnik 2014). Conclusion Financial statements assist people to examine the company historical, current and future performance of the company. The four financial statements are interconnected in one way or another. Statement of equity balance is prepared from the balance sheet each year by the amount of net income from the income sheet. The net income on the income sheet depends on the amount of debt on the balance sheet. The company managers use financial statements to show how the business is performing. Suppliers are also concerned with the financial statement. Government is another income statement. Both investors, shareholders, lenders among another interested party in the business are interested in the company. Therefore, income statements are an essential instrument for economic evaluation of the business performance. Bibliography Anderson, U. L., Christ, M. H., Johnstone, K. M., Rittenberg, L. E., Statements, F., Asare, S. K., ... & Verrecchia, R. E. (2012). VOLUME TWENTY-SIX, NUMBER TWO JUNE 2012. Zeff, S. A. (2014). The Trueblood Study Group on the Objectives of Financial Statements (1971-73): A Historical Study. Available at SSRN 2485887 Hoyle, J. B., Schaefer, T., & Doupnik, T. (2014). Fundamentals of Advanced Accounting. Mcgraw Hill Higher Educat Linsmeier, T. J. (2011). Financial reporting and financial crises: The case for measuring financial instruments at fair value in the financial statements. Accounting Horizons, 25(2), 409-417. Hoyle, J. B., Schaefer, T., & Doupnik, T. (2014). Fundamentals of Advanced Accounting. Mcgraw Hill Higher Educat. Read More