The Objectives of Financial Statements and there Usefulness to the General User Groups

 THE OBJECTIVES OF FINANCIAL STATEMENTS AND THERE USEFULNESS TO THE GENERAL USER GROUPS

Financial statement may be defined as a set of report prepared by a company in line with regulatory statutes and for the information of all groups that have on interest or another in the company.  It is in fact an aggregate financial report for a whole entity or division of an entity for the benefit of external users.

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OBJECTIVE OF FINANCIAL STATEMENT

The objective of financial statements is to provide information that helps users make better economic decisions.  There are two broad groups of decision makers who use financial statements.  One group is the management of the business who rely on accounting data to make important management decisions.  The second group is “external” decision makers.  This group consists primarily of investors (both present and potential owners), investment analysts, creditors, government, labour organizations and the public.  Financial accounting and the external financial reports serve a diverse group of decision makers with different information needs.

USERS OF FINANCIAL STATEMENTS

The main users of financial statement are identified with the main reason they require the accounts.

  1. Shareholders of Companies: Both existing and potential, will want to know how effectively the directors are performing their stewardship function.  They will use the account as a base for decision to dispose of some or all of their shares, or to buy some.
  2. Employee Groups: This includes existing, potential and past employees.  These can include trade unions whose members are employees.  Past employees will be mainly concerned with ensuring that any pensions, e.t.c, paid by the company are maintained.  Present employees will be interested in ensuring that the company is able to keep on operating, so maintaining their jobs and paying them acceptable wages, and that any pension contributions are maintained.  Potential employees will be interested in assessing whether or not it would be worth seeking employment with the company.
  3. The Loan – Creditor Group: This consists of existing and potential debenture and loan stockholders and providers of short-term secured funds.  They will want to ensure that interest payments will be made promptly and capital repayments will be made as agreed.
  4. Bankers: Where the bank has not given a loan or granted an overdraft, there will be no great need to see the accounts.  Where money is owed to the banks they will want to ensure that payments of interest will be made when due, and that the firm will be able to repay the loan or overdraft at the correct time.
  5. The Analyst/Adviser Group: These will need information for their clients or their readers.  Financial journalists need information for their readers; stockbrokers need it to advise investors.
  6. The Business Contact Group: This includes trade creditors and suppliers, who will want to know whether or not they will continue to be paid, and the prospects for a profitable future association.
  7. The Public: This consists of groups such as ratepayers, taxpayers, political parties, pressure groups and consumers.  The needs of these parties will vary accordingly.
  8. Management: In addition to the internally produced management accounts the management is also vitally concerned with any published accounts.  It has to consider the effect of such published accounts on the word at large.

Types of information’s required by users of financial statements.

Users of financial statements are interested in three types of information.

  1. Information about past performance: Information concerning such items as income, sales volume, extra ordinary items, cash flows, and return earned on the investment helps assess the success of the business and the effectiveness of the management.  Such information also helps the decision maker compare one entity with others.
  2. Information about the present condition of a business: This type of information helps answer such question as:  What types of assets are owned? How much debt does the business owe, and when is it due?  What is the cash position?  What is the inventory position?  Answers to these and similar economic questions help the decision assess the successes and failures of the past; but, more importantly, they provide useful information in assessing the cash flow and profit potentials of the business.
  3. Information about the future performance of the business: Decision makers select from among several alternative courses of action.  Each course of action will cause different results.  All decisions are future oriented because they do no (and cannot) affect the past.  However, in predicting the probable future impact of a decision, reliable measurements of what has happened in the recent past are valuable.

CHARACTERISTIC OF USEFUL INFORMATION

From the various reports which have appeared since 1975 the following characteristics have been noted.

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  1. Relevance: This is regarded as one of the two main qualities.  The information supplied should be that which will satisfy the need of its users.
  2. Reliability: This is regarded as the other main quality.  Obviously, if such information is also subject to an independent check such as that of the auditor, this will considerably enhance the reliance people can place on the information.
  3. Objectivity: Information which is free from bias will increase the reliance people place on it.  It is, therefore, essential that the information is prepared as objectively as possible.
  4. Ability to be understood: Information is not much use to a recipient if it is presented in such a manner that on one can understand it.  This is not necessarily the same as simplicity.
  5. Comparability: User of financial statement will want to compare them both with previous account of that company and with the result of other companies; without comparability the accounts would be of little use.
  6. Realism: This can be largely covered by the fact that accounts should show a “true and fair” view.  It has also been contended that accounts should not give a sense of absolute precision when such precision cannot exist.
  7. Consistency: This is one of the basic concepts, but it is not to be followed slavishly if new and improved accounting techniques indicate a change in methods.
  8. Timeliness: Up-to-date information is of more use to recipients than outdated news.
  9. Completeness: A rounded picture of the company’s activities is needed.

Usefulness of financial statement to general user groups.

Financial statements are useful to the various user groups in the

Following ways discussed below:

  1. Financial statement provides information that is helpful in making decisions. Most important decisions, regardless of the type of endeavor involved, are based, in part, upon complex financial considerations.  Financial statements provides an important information base and a particular analytical orientation that help the decision maker assess the future financial implications and potential outcomes of various alternatives that are considered.
  2. Financial statements reports the economic effects of past decisions on the entity. Once a decision is made and implementation starts, significant and often subtle financial economic effects on the entity occur.  These economic effects often are critical to the success of the endeavor.  The evolving effects of past decisions must be measured continuously and periodically reported so that the decision maker can be informed of continuing and newly developing problems, and of successes, overtime.  Financial statement provides a continuing feed back of the economic effects of a series of decisions already made, the results of which are communicated to the decision maker by means of periodic financial statements.

Financial statements keeps track of a wide range of items to meet the financial score-keeping and safeguarding responsibilities that must be assumed by all organization.  These include how much cash is available for use; how much customers owe the company; what debts are owed by the organization; what items are owned by the company, such as machinery and office equipment and inventory levels on hand.

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