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BAO2202 Accounting Assignment: Accounting Treatment

   

Added on  2020-05-28

20 Pages5195 Words154 Views
Running Head: Accounting treatments of various elementsFinancial Reporting

Accounting treatments of various elements1PART IABSTRACTThis report identifies the significance of qualitative characteristics of financial information. The financial information contained in the annual reports helps the users of financial reports in making various decisions regarding their association with the reporting. This report incorporates all the necessary characteristics that must be possessed by the financial information so as to influence the user’s decision. The preparers of financial reports must give importance to each and every qualitative characteristics, as prescribed by the conceptual framework, while preparing the annual financial reports. INTRODUCTIONEvery entity has to prepare financial reports for every fiscal year. This report contains the information regarding the transactions and events entered into by the entity. The information contained in the annual reports is generally given in the financial terms. Annual reports helps the entities in promoting their business by communicating the key achievements and financialresults of their businesses. These reports are intended to be delivered to various stakeholders of the company. Financial reports helps the stakeholders to assess the financial health of the company so to take the sound and informed economic decision. Annual report is a comprehensive set of financial documents such as statement of financial information, state of financial position and cash flow statement. These statements covers the financial information regarding all the important aspects of the business of the reporting entityPART 1Financial reporting is the process of preparation and presentation of financial reports of the entity which contains information of all the significant transactions and events undertaken by it in any fiscal year. An annual report serves as the only mean of communication of

Accounting treatments of various elements2information regarding the entity’s state of affairs, between the company and its stakeholders. Stakeholders are the parities who uses these reports to take sound economic decisions regarding the reporting entity. These stakeholders are generally classified in two categories i.e. internal stakeholders and external stakeholders. Internal stakeholders are the ones who aredirectly involved in managing the regular operations of business of the entity. However, the external stakeholders are not directly involved in the regular business operations of the entity,yet their decisions are influenced by the information contained in the financial reports.As information contained in the financial reports can directly influence the decisions of the intended users, it must possess all the qualitative characteristics as prescribed by the conceptual framework (Benston et al., 2007). The financial reports must be prepared and presented in such a way that it complies with the requirements of conceptual framework (AASB, 2013). The qualitative characteristics of useful information can be bifurcated into sections. One is fundamental qualitative characteristics and other is enhancing qualitative characteristics. As the fundamental characteristics, the framework defines relevance and faithful representation of financial information and as the enhancing qualitative characteristics, it defines comparability, verifiability, timeliness and understand-ability of the financial information.To influence the decisions of the users of financial reports, the information must be faithfully represented and it must also be relevant. However, the usefulness of information enhances if it is verifiable, comparable and easily understandable at the same time. An information is saidto be relevant when it is capable of influencing the reader’s decision. To make any difference to the decisions of intended users of financial reports, the information contained it must have confirmative or predicative values or both. The predictive value of the information is achieved when it can be referred as input for the processes used by the stakeholders to predictthe future financial outcomes of related transactions. Whereas, the confirmative value of the

Accounting treatments of various elements3information is achieved when it is capable of providing feedbacks for the past evaluations made on the basis of financial reports. The predictive and confirmative values of the information are generally interrelated. Materiality is the other important characteristic of financial information which increases its usefulness. An information is called as material when its misstatement or omitting can influence the user’s decision that they make using the financial information. Materiality of information is determined on the basis of the nature or magnitude the elements to which the information is related. Faithful representation of information is also an important criteria to judge the quality of the financial information. An information is said to be faithfully represented if it complete, free from misstatements and unbiased (Draft, 2015). The completeness of the information is achieved when it contains all the necessary explanations and description regarding the matters involved in the financial reports. Neutral information does not imply that it has no influence or purpose rather neutrality is achieved when information is selected and presented in the completely unbiased manner. An unbiased information is never slanted or manipulated to inflate the profits to impress the stakeholders of the company (Whittington, 2008). Moreover, when the information is free from errors it does not imply that it is accurate in all the respects. Rather, when the information is said to be free from errors it means that there exists no error or omission in the process used to generate the reported information. Financial information contained in the annual reports of the company must be both relevant and represented fairly and faithfully so as to be useful for the intended users (Nobes & Stadler, 2015). If the information is faithfully represented but is irrelevant from the viewpoint of intended users than it would not be able to influence the decision making process of the users. At the same time, if information that is relevant enough to affect the reader’s mind but is not represented faithfully, then it would not allow the users to make the appropriate decisions regarding the reporting entity.

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