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Organization Accounting and Stewardship

Essay by   •  February 10, 2011  •  Research Paper  •  4,184 Words (17 Pages)  •  1,642 Views

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ABSTRACT

In this paper, I discuss the relevancy and reliability of current financial Statements prepared under the historic cost convention and following the accruals concept, investigating the Strengths and weakness of the financial statements in providing "useful" information to the users (Board OF Directors and Management of the Firm ,Shareholders, Employees , Lenders ,Suppliers , Customers , Government's , The public ) With theoretical discussions and detailed analysis to the elements of the basic (3) Statements, Balance Sheet , Profit and Loss , Cash flow , in terms of relevancy and to whom is it relevant , how far can the figures support decision maker, also how far can these information represent reality and if they can be manipulated to give different results which reflects total different picture then reality presenting how reliable it is , also i will discuss the relation between these statements if there is still a need for the current articulation specially between Balance Sheet and P&L statements, I will support my discussion with references and researches and articles from the internet also a real life cases to support my argue .

Introduction .

Board OF Directors and Management of the Firm ,Shareholders ,Employees , Lenders ,Suppliers , Customers are what a firm deals with in the day to day activates , it is a business fact , when we say dealing , in my opinion , this means "Requesting or Demanding " , "Review Request and Approve", "Action", "Feedback on Action" , for example if the management of the firms decided to penetrate the market with new product that needs new expansion that needs new investment a 'request' will be forwarded to the Owners of the Firm to 'decide ' to increase the investment , so a 'review' will be held and finally 'approval' , now for the action , if the owners will decide to finance the new expansion through a bank loan then a 'request ' will be sent to the bank , the bank will 'review ' and 'decide' to 'approve' the loan , the bank will feedback the firm board and management with approval and terms and conditions for the loan .

Based on the previous business Demanding to Action cycles a set of financial reports that present useful information to all the expected users when it comes to making a business decision or a business review in this business cycles is very important, that is why Financial Accounting Standard Board (FASB), agreed about standardizing a generic purpose set of Financing reports that is useful to present and potential investors and creditors and other users in Determining and predicting the balances and availability of short-term financial resources, including cash, also Determining and predicting the cost of Operation , Ability of the Firm or Business entity to generate Cash to meet it's Obligations (Current and Future ) , and may other measurement figures provided by these Financial Statements.

Statement of Financial Accounting main objective is to provide useful decision-making information for investors, creditors, and other users. These "Decision Usefulness" criteria should be based on (2) main facts , which are Relevance and Reliability. The FASB defines relevance of information as " the information capability of making a difference in decisions to predict, confirms or correct prior expectations". Reliability is defined as " the ability to be reasonably free of error and bias and to be represented faithfully ",As Stated in Leicester Manual

"Relevance The information provided should satisfy the needs of the information users. In the case of company accounts, clearly a wide range of information will be needed to satisfy a wide range of users. What is relevant to one user for one purpose will be less relevant to other users."

Leicester,2.23

"Reliability Information will be more reliable if it is independently verified. The law requires that the accounts published by limited companies should be verified by auditors, who must be independent of the company and must hold an approved qualification."

Leicester,2.24

GAAP financial reporting requirements tend to assure reliability over relevance. The focusing on reliability resulted in ignorance of market value in financial reporting and neglect to current economic reality of a firm. It is this relative emphasis that has caused so much of the attention , which is the aim of this paper to investigate , as I will go through the elements of the basic financial statements (Balance sheet , Profit and loss, Cash flow ) , Showing how relevant and how reliable is it with respect to the users who may need to take a business decision (like a bank that will decide to lend the firm a loan ) , or a business follow-up decision ( like board of directors either will need to check if the new CEO and his senior management are doing a good job or not "stewardship follow-up" , or will decide to release a new product ) .

Another very important area when evaluating the Financial statements in terms of Relevancy and Reliability is the historic cost convention following the accruals concept and it's relation to the Current economic of the Firm investment , For example the Fixed asset value is changed over the period that it was owned by the firm this means that the historical cost of this asset in the annual balance sheets does not reflect it actual value , for example real-estate prices (Lands , Buildings ..etc ) are subject to value change that is not reflected in the Balance Sheet, same issue is related to the Current Asset (Goods in the Sore ready t be sold ) and it's relation to the Inflation Rates that is been a fact in the Business ,also the reliability of the number is an important factor , as by end of the day accounting reports are prepared by the Firm management , biased decision could take place by management for a better picture of the firm and position keeping misleading external and internal users of the accounting reports , also the relation between the financial statements how do they affect each other reflecting an over all relevancy and reliability ( Since they affect each others in figures ), these issues and others will be my focus while walking through the Financial statements elements .

Financial Position Statement (Balance Sheet )

In the Balance Sheet , the Current assets and the liabilities are presented with their current amounts , but they are added to the historical cost of the fixed assets , problem of

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