Users And Characteristics Of Financial Statements

There are several users of financial statements having varied level of interests and needs from the financial information that these statements reflect upon. These users along with their relevant need for financial information and the way in which financial statements meet those needs have been discussed as follows:

1. Management: It is a collective term which represents all those people who are vested with the responsibility of decision making in a particular business. Having access to the financial statements of the organisation will help in effective decision making. It is the responsibility of the management to ensure that the resources of an organisation are employed as efficiently as possible to meet the overall objectives of the business. Having access to financial information is paramount which lets them indulge in effective managerial decisions (Schroeder, Clark and Cathey 2019).
2. Owners as Investors: Investors are the stakeholders that assume all risk by investing capital into the business. Hence, it is important to ascertain the financial viability of any particular investments and thus having access to financial statements can help them judge whether to buy, hold or sell their investments. Furthermore, they are also interested in judging the ability of the business to pay dividends, to exist as a going concern and to grow.
3. Lenders: Lenders help in providing access to debt financing to businesses. As a result, the organisation’s financial statements can help them to judge the company’s creditworthiness and debt repayment capacity. Furthermore, lenders tend to evaluate the gearing of a company and in case of higher risk exposure, they can impose covenants or ask for collaterals to minimise their risk exposure. Having access to financial statements also help in evaluating the company’s compliance towards the debt covenants imposed by lenders.
4. Employees: Employees would also want to know about the profitability and stability of their employers. They are interested in knowing the company’s ability concerning remuneration, benefits, stock options and employment opportunities. The growth of employees depends upon the growth of the company and by having access to financial statements, the employees can ascertain growth prospects which in turn assists them in making their own career related decisions.
5. Customers: The customers are also interested in information which concerns the continuity of the business which depends upon prosperity. Particularly, they require information related to present & future supply, prices & other details of offerings, and other sales conditions. Most of this information will be available through sales literature. However, customers may want to inspect the financial statements when making advance payments or wanting to know the ability of the entity in meeting obligations under warranties or guarantees.
6. Creditors and Suppliers: These stakeholders are also interested in having access to financial statements to judge the ability of the company in paying their dues and their overall liquidity management. This in turn helps with making informed decisions such as credit policies, rates to be charged or requirement of any securities. Often when their bargaining power is comparatively lower and their survival depends upon such agreements, they may be interested in the ability of the business to exist as a going concern.
7. Government and Agencies: These stakeholders also require access to accounting information as they regulate the functioning of businesses for public interest, allocate resources among competing entities, control prices and charge duties & taxes. As a result, they tend to have continued interests in the financial affairs of the business.
8. Public: The general public is also interested in the financial statements of an entity as businesses are expected to be accountable for public interest. Businesses tend to make substantial contribution to the local economy by promoting local suppliers, providing employment opportunities and incurring community investments. Financial statements can help the public in ascertaining trends and recent developments concerning the range of activities of the business (Weygandt et al.2018).

Requirement 1

The key features of the three financial statements that have been prepared falls in line with the qualitative characteristics as mentioned in the Conceptual Framework. These have been discussed as follows:

1. Understandability: The financial statements are easily understandable by the users of financial information who tend to have a basic knowledge in the field of accounting and finance. It is because the information is presented in such a way that it is easy for the users to comprehend the same. However, if an information is complex yet relevant, it will not be omitted irrespective of difficulty because of its importance in decision making (Weetman 2019).
2. Relevance: The financial statements comprise of information which is ‘relevant’ for the users of financial information. This helps them in making effective decisions. Relevant information helps in evaluating past, present and future events concerning the business. Relevant information may hold predictive value, confirmatory value or even both.
3. Reliability: The information communicated from these statements will not be of use for the intended users if these are not trustworthy and reliable. In order to be reliable, an information must be free from errors and should not consist of material bias.
4. Comparability: The financial information presented in the financial statements are presented in such a way that the users can compare such information over a particular period of time (Weetman 2020).

Requirement 2

The income statement, statement of financial position and the statement of cash flows are interrelated in several ways which have been outlined as follows:

1. The net profit/net loss which is calculated in the income statement is then transferred to the retained earnings account which increases/decreases the value of total equity reported in the statement of financial position.
2. The net profit figure from the income statement is also the starting point of the cash flow statement when prepared using the indirect method.
3. Changes among several line items from the statement of financial position are rolled forward to the cash flow statement.
4. The closing balance of cash calculated in the cash flow statement also appears as a current asset in the statement of financial position (Warren, Reeve and Duchac 2016).

Requirement 3

1. Profits and Cash are two different metrics. Profits can be interpreted as the excess of revenue over the total expenses incurred during the year while cash can be interpreted as the absolute liquidity (money/funds) flowing in and out of the business for a particular time period. Profit for the year is calculated in the income statement using the accrual basis of accounting while cash as at the year end date is calculated in the statement of cash flows based on the cash basis of accounting.
2. The difference between expenses and payments are also based upon the difference between accrual and cash accounting. Expenses can be interpreted as costs which have been consumed by the organisation while payments refer to cash disbursements concerning expenses. Although these may sound familiar, there may exists differences between the two based upon timing. Further, expense is charged to the income statement while payments represent an outflow of cash in the statement of cash flows (Shim et al.2015).

Assumptions in 5.3:

1. New Investments is considered as an inflow of cash as mentioned in the question.
2. Inventory on hand is recognised as an expense based upon the assumption that the opening inventory is zero which requires the closing inventory to be treated as cash disbursement paid to suppliers.

References

Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and analysis: text and cases. John Wiley & Sons.

Shim, J.K., Siegel, J.G., Dauber, N.A. and Qureshi, A.A., 2015. Accounting handbook. Barrons Educational Series, Incorporated.

Warren, C.S., Reeve, J.M. and Duchac, J., 2016. Financial & managerial accounting. Cengage Learning.

Weetman, P., 2019. Financial and management accounting. Pearson UK.

Weetman, P., 2020. 860. Financial Accounting An Introduction.

Weygandt, J.J., Kimmel, P.D., Kieso, D.E. and Aly, I.M., 2018. Managerial Accounting: Tools for Business Decision-making. John Wiley & Sons.

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