Financial_Statement

OBJECTIVES OF FINANCIAL STATEMENT. According to International financial reporting standard 1st July (2004) The main objectives of financial statements are: a) To provide information about the financial position, performance and cash flows of an entity that is useful to a wide range of users in decision making and evaluating decisions about the allocation of resources. b) To provide information useful for decision making and to demonstrate accountability of the entity for the resources entrusted to it by:  Providing information about resources, allocation and uses of financial resources.  Providing information about how the entity financed its activities and meet its cash requirements.  Providing information that is useful in evaluating the entity’s ability to finance its activities and to meet its liabilities and commitments.  Providing information about the financial condition of the entity and changes in it.  Providing aggregate information useful in evaluating the entity’s performance in terms of service, efficiency and accomplishments. CIMA Examination Kit (New edition Focused, Nov 1996 and 1997) page 239 explained that the objectives of financial reporting are to provide users with greater level of information about the results and resources of a group than is available from profit and loss account. Thus is evidently that the objective of financial statement is about giving information about the organization’s financial position and operations which will provide the basis for decision making. 2.1.6 COMPONENTS OF FINANCIAL STATEMENT According to IAS 1, a complete set of financial statement should contain the following: Income Statement It is referred as the Profit and Loss Account or Income statement in the case of trading enterprises, which is calculated to summarize the results of the operation of an enterprise during the accounting period. In the case of government, charity organizations, whose motive is to provide services, this will be a summary statement Income and expenditure, being a summary of all the statements signed by accounting officer as per section 25 subsection 2(a) and 2(c) of the Public Finance Act, 2001 (applies only for Government Organizations). Balance Sheet This shows the financial position of an entity on a specific date. Each entity should present in its financial reports based on the nature of its operations, clear classification between current assets and fixed assets and another between its current long-term liabilities as separate classifications on the face of balance sheet. Cash Flow Statement It provides the basis on how an entity generates cash and cash equivalents and uses them from various sources and various dealings respectively. Statement of changes in Equity This shows the changes in share capital, profit or loss for the period and any other accumulated reserve such as the share premium. These are presented on the face of statement of changes in equity or in the notes. Notes to Financial statement. The notes of financial statement should;  Present the information about the basis of preparations of financial statement and the specific accounting policies.  Disclose any information required by IFRS that is not presented on the face of international statements.  Provide additional information that is not presented on the face of financial statement that is deemed relevant to an understanding of any of the item. 2.1.7 USERS OF FINANCIAL STATEMENT As it has been discussed earlier, the purpose of accounting is to provide financial information for decision makers about economic activities. The value of financial report is determined by how well it meets the needs of those who use it. It is concerned with measuring financial resources used to acquire other resources, the conversion of resources into goods and services and the prices of goods and services sold to costumers. The following are the financial statement users: a) owners and managers These are one of the major financial report users, in case of the owners they want to know exactly what they earn from what they have invested by observing the financial performance and the position of the firm. To the managers they are also interested in this financial report since they are the firm’s decision makers. b) investors Financial reports helps investors to evaluate the risk and the return they expect from their investments or if they are interested to invest. c) supplies These are the people who are providing goods and service to the firm in terms of credit. Therefore they have to use financial report in order to know the condition of the organization they provide temporal financial assistance by providing goods and services, if meet with their conditions. d) employees These are working in the firm and they have to be paid their salaries and wages and they have to know whether they will have the job in the future. Knowing this is all from using financial report. e) Those providing financial accommodation to an enterprise, including banks etc. f) The public including, tax payers, consumers, and other community and special interest groups such as political parties, environmental protection societies and regional pressure groups. g) the government with its ministries and several regulatory authorities, including tax authorities, department and agencies concerned with the supervision of commerce and industries and local authorities 2.1.8 QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENT There is necessary attributes which should be possessed by a financial report so as to enable interested parties to make rational economic decisions. The useful information contained in financial report should posses the following characteristics; Alexander D and Briton A (1986) a) understandability Different users will obviously have different levels of ability as regards understanding of accounting. Understandability doesn’t’ mean necessarily simplicity. It means that a report geared to abilities and knowledge of the users concerned. Complex economic activities being reported to an expert may well require extremely complicated reports. Simple aspect being reported to the users with little or no background knowledge will lead to be very simple. The problem really arises when we have the task of reporting on complex activities but to the non expert users. b) relevance To be useful, information must be relevant to the decision-making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations. c) reliability To be useful, information must also be reliable. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users. The information may be relevant so unreliable in nature or representation that its recognition may be potentially misleading. d) accuracy This refers to a situation where the contents of the report are assumed by an independent opinion expressed by the external or internal auditors’ reports to be accurate and correct. e) timelines This means the information should be presented to the user in time for use to be made of it. Information presented should be as up to date as possible. Approximate information, are available from time to assist some decision or action is likely to be more useful than presented after the decision has already been made. f) comparability Information about any one business for any one period should be presented so that; -it can be compared with similar information about that business for the same other period -it can be compared with information about different business for the same or different period. Such comparability is usually achieved through a combination of consistency and disclosure. g) completeness To be reliable the information must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus unreliable and deficit in terms of its relevance. h) objectivity The information prepared must be objective or unbiased in that it should meets all proper user needs and neutral in that the reception of the answer should be biased towards the interest if any one user group 2.1.10 DECISION MAKING Decision comes from the word decide, which means that to choose on in preference to other variable alternatives. Decision-making involves a choice of actions or strategies, the outcome of which may be known for certainty or completely unknown. Decision making had been defined by different users, as follows; According to Weihrich and Koontz (2001), Decision-making is the selection of a course of action from among alternatives; it is the core of planning. Cole (1993) defined Decision-making as an accepted part of every day human life. According to Gupta (2001): Decision-making is the process of choosing a course of action from among alternatives to achieve desired goals. It consists of activities a manager performs to reach conclusion. Decision-making is the process of selection and aim is to select the best alternatives. 2.1.10.1 FEATURES OF DECISION-MAKING One is able to recognize decision making if it contains some characteristics. Gupta (2002) pointed out the features of decision-making to be the following:  Decision making is a goal-oriented process.Decisions is made to achieve some goals or objectives. The intention is to move towards some desired state of affairs.  Decision making implies set of alternatives. A decision problem arises only when there are two or more alternatives. If there is only one alternative, there is no decision to be made.  Decision making is dynamic process. It involves time dimension and a time lag. The techniques used for choice vary with the type of problem involved and the time available for its solution. It is situational.  Decision-making is always related to the environment. A manager may take one decision in a particular situation and quite another in a different situation.  Decision making a continuous process or ongoing process. Managers have to take series of decisions and managerial job is perpetually decision making exercise.  Decision making implies freedom to the decision maker regarding the final choice. It also involves commitment of resources in specified ways.  Decision making is an intellectual or rational process. Decisions are the products of deliberations, reasoning and evaluation. However, Gupta further argued that decision making cannot be completely qualified. Many decisions are based on intuition and instincts. Systematic analysis of pertinent fact is not always possible.