Nowadays organizations keep books of accounts and later on prepare financial statements so that they can understand how the operations of an organization are been carried out to ensure income is generated is adequate to enhance growth and development into the future.
Financial statements refer to the documents that are used in presenting financial data to communicate to the users about a firm’s financial position. The results that are received by the financial analysts are used to show a general overview of the business’s financial condition in the short and long-term accounting period. The documents used in reporting financial data include the balance sheet, income statement, and cash flow statement.
Balance sheet
It is a financial statement that shows the financial position of a company that is used to report on the company’s assets, liabilities, and net equity that occur at any given period of time when a firm is carrying out its activities. It shows what a company owns and owes within an accounting period.
Liabilities stated within a balance sheet indicate the amount of money that a company owes other companies that it’s conducting business with. Shareholder equity indicates the capital or net worth that shows the amount of money that is left after a company sells some of its assets and pays up its liabilities of the customers as they occur within an organization, Richard and Janet (1997 p32-36).
Income statement or the profit and loss account
It is a financial statement that is used in reporting ca company’s income, expenses, and profits over a given period of time. The purpose of this document is to show the amount of money a company has generated and spent over a specified period of time.
Statement of cash flow
It’s another financial statement that shows how companies utilize its cash and how it generates cash after carrying out different activities. The activities involve: operating, investing, and financing activities. The cash flow statement is used to show how well a company can meet its financial obligations when they arise during the accounting period.
Similarities between balance sheet, income statement, and cash flow statement
The balance sheet and income statement are recorded in books of accounts on an accrual basis whereby the expenses incurred are matched with revenues that are generated within an organization. All the companies should prepare financial statements that include balance sheets, income statements, and cash flow statements as per the Company’s Act. Cash flow statement information is derived from the income statement and the balance sheet of a firm therefore they bear some similar characteristics such as they are prepared in the year in which they occur.
Differences between balance sheet, income statement, and cash flow statement
According to Richard and Robert (1996), they stated that a balance sheet shows firm financial resources and obligations that should be undertaken within a specified time. Income statements are used to show firms’ financial transactions at different times as a company continues to undertake its operations. The cash flow statement shows how cash inflows and outflows are used and spent in the current financial year of a business. The cash flow statement also shows changes that occur in firms working capital and cash generated as a result of carrying out activities within an organization. The balance sheet and income statement indicate the cash that may get in and going out of an organization while cash flow shows the cash that is currently been generated within an organization.
Critical evaluation of information needs of four non-management user groups.
The non-management users of financial information involve potential investors, banks, government agencies, and other parties that may not be working within the business premises. Investors use financial statements to verify whether a company is viable enough to allow investors to take place since the stability of a company determines whether it will generate a return in the future or not.
Audit committees are persons who are appointed to carry out audit work within an organization. Their duties and responsibilities are stipulated within the audit committee charter. The role of these committees is to ensure that the board of directors is assisted in evaluating: company’s financial statements and financial reporting processes and internal controls it also takes into account internal auditors’ qualifications and independence that they should exercise while undertaking their tasks. The finance committee is another group of non-management users of financial statements. They monitor the company’s financial conditions, overseas, and uses of cash flows.
According to Siegel, he stated that the media and general public may require the financial statements to evaluate whether their operations are been carried out effectively through the implementation of policies that are crucial for an organization. Non-management supervisors help an organization in ensuring that they acquire the necessary information such as independence, experience, and insight in all manner of consulting services that are undertaken within an organization that promotes growth and development. In case conflicts arise as a result of disagreements between parties within an organization then supervisors may play a significant role in ensuring that conflicts are solved amicably.
Investors are persons that use the financial information to determine the kind of risks their investments are exposed to, to evaluate the kind of returns that their investments will generate within a specified time. They also use the financial information to decide on where to buy or sell their investments that derive enough revenue that meet the costs incurred in running the operations of an organization. A company’s ability to provide dividends is determined by the financial statements this is because profits generated are given out to the shareholders in form of dividends.
Government and related agencies are institutions that require financial information to determine whether companies and individuals have had their incomes subjected to tax.These institutions derive their revenue from taxes and fines collected from the individuals and corporations, therefore government ensures that the laws and regulations relating to tax returns are adhered to effectively. The government allocates the finances to different public institutions such as schools, hospitals so that the public can receive affordable and quality services from the government.
Suppliers are persons whose duties and responsibilities are to deliver raw materials, finished goods to the manufacturers and wholesalers respectively. They assess the creditworthiness of their clients through evaluating the clients’ financial statements to determine how their dues will be repaid within a stipulated time, Black (2005, p.1-5).
Customers of a firm use the financial statements of a firm to determine whether their firms’ operations will continue in the future to evaluate whether they can purchase goods and services from a company they rely on to provide them with the items they prefer to use at home and places of work.
The financial institution such as the banks, mortgage companies, and microfinance institutions assesses the creditworthiness of their clients through evaluating their financial statements. Where the company is stable and has many assets it means that it can be granted financial resources since they can act as collateral that they can pay up their dues as they arise. After the financial institution assesses the customer’s creditworthiness they, later on, offer them credit facilities as per their demands. They may also require the financial statements to decide the amounts of grants such as working capital or external debt securities that would be used to expand the operations of an enterprise within the stipulated time
The labor leaders may require the financial statements to verify the number of wages that are awarded to each employee to avoid ghost workers from being paid by the finance officers in organizations. They are using the financial information to determine the amount of wage increase they should negotiate for their workers to have their terms of employment improved and to motivate them to increase the output of the organization, Altaf (2008).
Competitors may use the financial statement of other companies in the same industry that conducts similar businesses to understand how to set up strategies aimed at improving the performance of their companies to remain competitive in the market. They may use financial ratios of other companies to understand who their competitors are in the market and the trend of business operations to work in those principles.
The regulations that preparers of financial statements of quoted companies follow
Quoted companies are the companies that have their equity share capital been included in the official list of the provision of part 6 of financial services and Markets Act 2000 or one that is under the New York Stock Exchange or the National Association of Securities Dealers Automated Quotation ( NASDAQ) that is an American stock exchange firm. The regulations that are followed by the quoted companies are found in the Companies Act 1985 (Operating and Financial Review) and the Directors Report. In March 2005 part 7 of the Companies Act was amended. The amendments that were made involved ensuring all the quoted companies prepared the Operating and Financial Review for the financial years that started on 1st April 2005.
The regulations that were introduced under the Operating and Financial Review under the quoted companies’ provision were: information concerning objectives and strategies of the company and that affected company’s performance. Other information that would be included in the act was that of the environment in which the company was undertaking its activities, details of employees within an organization, social and community issues that were affecting the operations of the organization.
According to Hassan (2008), he stated the quoted companies are expected to carry out auditing tasks to verify whether the books of accounts have been properly kept and maintained to reflect a true and fair view of the financial statements. Auditing services are carried out under the Government auditing standards, Audit of the state, local government, and non-profit organizations. The auditors carry out tests to evaluate the effectiveness of the design and operation of the internal control policies and procedures to detect any laws and regulations that a company may not be following which may lead to qualification of the audit report by the management of the organization.
Financial statements are useful within an organization since they indicate a company’s performance within a stipulated period. It is important for the management of organizations to keep proper books of accounts so that they can be able to gauge the performance of a company and determine how profitable it is and whether it can remain competitive in the market.
References
- Altaf, H. 2008,” The management of organizations needs to keep Financial literacy for nonprofit boards – Part 1 & Part 2.
- Bebbington J., Gray, R., and Laughlin, R 2001, “Financial Accounting Practice and Principles”, 3rd Edition, Thomson, p.11-13 and 137-143
- Black, G 2005, “Introduction to Accounting and Finance”, Pearson Education, p.1-5
- Britton, A., and Waterston, C 2005, “Financial Accounting”, 4th Edition, Pearson Education, p.9-11, and 51-68
- Richard, A. C. and Janet, L. C 1997, “We Need Better Financial Reporting.” Management Accounting: 32-36.
- Richard, V., and Robert. J 1996, “The History of Accounting. (Michael Chatfield and Richard Vangermeersch, Eds. New York: Garland.
- Siegel, Marc A.2008. Big Changes Afoot at US Financial Accounting Standards Board(FASB) but are they the Right Ones.