Financial Statements
A fair while ago there was a time when a company’s financial statements were never displayed for the world to access or see, like how we are with our own financial information. This, however, has changed and financial statements are open for all to see, this hasn’t always been the case. Previously especially for equity investors, who never really had the power to request these documents and, in the end, would have had to make the decision to invest blindly without the information they would have really needed to make a more informed decision. Now, investors can see past performance of a company they are looking to invest in, this will give them the information they need to determine whether the investment is worth making. Lenders have always had more power to request documentation when providing debt to a company, however, with the changes of the time and new rules and regulations that were introduced lenders can also see past performance of a company to determine if the company is able to facilitate the repayments of the loans. Rules and regulations are now in place across the globe for companies to follow regarding the transparency of their financial statements.
Rules, rules, rules, and more rules
The GAAP (Generally Accepted Accounting Principles) are the basic set of rules that all accountants need to follow when they are preparing financial statements, although these rules can vary from country to country all firms within a country apply the same set of rules. GAAP only apply when accountants are preparing financial documentation for external entities however most also apply those same rules when preparing internal documentation to avoid creating more hard work for themselves. The rules set the most basic standards for accountants to follow, although these are basic standards, the rules themselves are not so basic. Along with the rules comes several governing bodies both Australian and internationally, The Australian Accounting Standards Board adopted the International Accounting Standards Board’s reporting standards making a tiny number of changes to suit Australian requirements. With so many complex rules in place it seems like being an accountant for any company that is governed by these rules and regulations would be somewhat like strolling through a mine field knowing that one step out of those rules could result in legal action for either yourself or the company in which you are preparing documentation for.
Rules for some but not for all
With all those strict standards, rules, and regulations one would think that this is a blanket that applies to everyone, well not so much. Only those who must prepare, and issue general financial statements are bound by those rules. Luckily for all those small businesses because if they were required to follow those rules and prepare such documents then their accounting costs would be disproportionate and through the roof. If you do not have any investors in your business, there is no real reason to prepare documents which display your financial performance. So how is that you decide who the rules apply to or not? Any company where you can identify types of users who require the financial statements to make educated decisions on how and where to best allocate their resources to get the best return on investment.
Accounting Concepts
Sitting here reading the list of accounting concepts is somewhat overwhelming, where do I use these concepts? Where would they apply? Are they all complimentary to one another or do they contradict here and there? I’m sure a seasoned accountant has no problems in knowing when and where to use each concept. To me it is ever so foreign, it also has me wondering how on earth I am going to be able to wrap my head around these as we move forward through the semester.
Accrual Accounting
The idea when I read it, I found it a little bit skewed, how on earth can I pay for something, and the business not recognise the exchange of money at the time that I gave it to them. Upon further reading I realised that it could be like when you purchase “credit” for your phone, you pay for the whole amount upfront, however your use small portions of it as you make calls or send text messages to friends until the money runs out. You have paid for the service, but you receive the service over a period and once it is all used, or the allotted time comes to an end then you must recharge your phone again to use the service. Although there is some benefit to this, for example, being able to see the performance of a business at any given time. Accrual accounting requires management and an accountant the make the assessments of performance, given the way that each could view the businesses, bias of some description could be applied in some way making the data and assessment of performance not exactly accurate.
Quality is Everything
As we know with most things in life, the quality of the things you eat, read, and wear matters, and data and information are no different. Faithful representation of the information and data is of the upmost importance, if your information is full of errors, full of bias opinions and data then the financial statement that is provided at the other end would not at all show a current and accurate picture of the performance of the business. Data and information provided need to be extremely accurate and provided with unbiased opinions and recommendations to ensure that the performance is accurately presented.
Next is relevance, irrelevant data and information requires people to sift through the information to find exactly what they are looking for, this would waste their time and run the risk of the information they find not being what they are looking for in the first place. Like Alice down the rabbit holes, finding distraction after distraction along her journey to find her way out, I mean at least Alice had some psychedelic aids along her journey. Back to reality though, only relevant information should be presented in financial statements, extra unrequired information will make the statement messy, over-crowded and difficult to understand.
There are other qualities that a financial statement should have however it needs to be stressed that the higher the quality of the financial statement the better represented the company will look, regardless of the outcome of the financial statement if it is of a high quality, this shows that the business is competent and not attempting to hide things. This section reminds me a bit of diamonds to be honest, there isn’t just one thing to go off when you are looking at a diamond and the quality isn’t just based on the size either; it’s based on the carat (size), cut, clarity and finally the colour. You could have a have a 5.0 carat diamond, but if the clarity and colour are on the low scale then it is worth nowhere near as much as a near perfect 2.5 carat diamond.
Business at Rest – 3.1
There are a few different financial statements that a business can provide to show its performance however what I didn’t know walking into this section (walking, what a joke, I meant stumbled) I didn’t realise that a balance sheet is literally a snapshot of whatever day they reported on. That’s it, all that effort on a report for just one day, I mean, most accounting software runs the report for you but imagine what it was like before that. I also wasn’t aware that the balance sheets could include more than one entity if the “parent” company has more than one business under its small (or large) umbrella. The things you honestly didn’t know before reading into this subject.
Business on the Move – 3.2
So, it’s not a secret that a business’s financial situation literally changes daily, it can add or reduce value at the drop of a hat, accumulate other businesses, even buy a mini donkey because who wouldn’t want that cuteness in their lives. The point in standing stationery is basically impossible for any business but showing these changes is something that is possible, this happens through an income statement. Usually over a 12-month period the statement will show the changes that happened and the effect that it has on the equity of the business. The income statement in its most basic form shows the money coming in vs the money going out, i.e., Revenue – expenses = profit/income.
All the financial statements that are provided to use provide us with the essential information to form the equation of Assets + Expenses = Equity + Revenue + Liabilities. We find these figures between the balance sheet and income sheets, along with the changes in equity statement and the cash flows statement these collectively paint a picture on what is moving and driving the business. Is the driver driving the business in the correct direction or did he take a wrong turn and taking the scenic route a dark dead-end alley? These statements are imperative for the business to be seen as trustworthy to those who conduct their business with it as well as those who entrust their business to it.
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