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Financial Accounting - DOC

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Added on  2020-11-30

Financial Accounting - DOC

   Added on 2020-11-30

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“Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results” (Kempner,1968). Its origins reside with farmers predating the 12th century in which it was used to make comparisons between who had the most wealth based on the amount of and type of animals they owned. In modern day, accounting is used to answer 3 basic questions what profit the business has made, how much does the business owe and how much it is owed. Accounting is split into different subgroups in which each performs a different task. Financial accounting is the process of classifying and recording monetary transactions of an entity in accordance with established concepts and standards, with presentation delivered by means of income statements, balance sheets and cash flow, during and at the end of an accounting period. (CIMA, Official Terminology, 2005). The other subgroup, financial reporting is the process of communicating financial accounting to users of such information. Users of this are management who use this information to operate the business more effectively and external stake holders such as investors, customers, regulators, who use this information to determine whether to get involved with a certain company or to implement restrictions. Furthermore, management accounting is the application of these principles to create, protect, preserve and increase the value for the stakeholders involved. These groups together, perform the task of making sure a company is financially stable.The traditional ideology of what accounting does, being the provider of unbiased information in order to facilitate social and economic activity by others. To comply with this,the FRS 18 identifies four ethical rules, Relevance, reliability, comparability and understandability (Financial reporting council, 2000). Relevance pertains to the information being useful for its intended purpose, being presented on time, influential on decisions and confirming what users already think. Reliability, meaning that information is realistic, objective and prudent- relating to a degree of cation when conditions are uncertain. In addition comparability dictates that financial statements can be compared from one period to another, meaning methods and information preparation should be consistent over time. Finally, understandability dictates that “capable of being understood by users having a reasonable knowledge of business.......and willingness to study withreasonable diligence” (FRC, 2000, para. 41). Therefore, having prerequisite knowledge is a must. By abiding by these ethical rules, firms will gather neutral, objective results that provide a faithful presentation of economic reality. A radical accounting ideology in which accountants are agents to promote social and economic change has become more prevalent. Tinker (1991) argues that accounting shouldn’t just be a passive representation ofreality, but a tool. Whilst, Solomons (1991) states that accountants jobs are to portray certain aspects of society, not change it. The latter view is commonly excepted, although Tinker does raise some substantial questions that will be discussed later on.
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“Financial reporting is usually seen as something very neutral, mechanical and objective, a process that simply measures the economic facts pertaining to a firm” (Palea, 2016). Accounting may aim to achieve this, although this is rarely the case as when compiling the many rules and accounting standards, external factors often drive away neutrality. Tinker’s, (1991) critique on Solomons map analogy dictates that we don’t judge a map on how well it represents facts, as maps are never shapes of the original, used as a political tool shaped by recreational, religious, economical and other interests. A study by Ryan et al. (2000) frimly stated that public sector accounting process has been increasingly influenced by powerful constituents. This political arena, often uses forms of voting to reach an agreement, where lobbying is involved to conform to a certain agenda. Not only is this constricted to the publicsector, but the private sector may be even further prone to these activities. The Financial accounting foundation, although being a non-profit organisation, received substantial funding from Enron corporation, which then approved a change in accounting methods from accrual to market to market (Culpan and Trussel in Huu Cuong, Nguyen, 2011). This unprecedented change in policy, distinctively shows that Enron influenced the FASB, thus proving the economic interest group theory of regulation. Due to the quantative nature of accounting, many items are omitted from accounting such as social and environmental factors. There is currently no accounting and auditing standards devoted to environmental issues within the UK. To encourage business to take up voluntary environmental reporting, the Chemical industries association has seen some success, with some companies finding that it’s a valuable business exercise, gaining valuable information at a relatively low cost (Gray et al, 1998). In regard to social accounting, UK companies, especially the larger ones produce a significant amount of social data, with an expectation to disclose information relating to corporate governance, charitable and political donations and many more. The Body Shop has been at the frontier of these latest developments, adhering to the growing trend in corporate social awareness (Thebodyshop.com, 2020). Overall, accounting is inherently bias from the reasons stated prior, although a push towards neutrality through using qualified members, independent of constituent pressure with implementation of environmental and social accounting may lead to a more inclusive version of accounting.demonstrate how accounting was used to conceal useful information which lead tocorporate collapse (gap between talk and action)A prime example of accounting failing to do what it is meant to, can be exemplified by the Carillion scandal. Being the UKs 2nd largest construction and facilities management company with over 43,000 employees and working on projects such as the Battersea powerplant, the company was thought to be too big to fail. However, a collapse at the beginning of 2015 leading to over 1.5Bn in debts and a substantial pension deficit, has lead many to believe, financial mismanagement is to blame (BBC News. 2020). Prior to their collapse, a number of red flags appeared, firstly Carillion was in the midst of a chain of large acquisitions, with the last being with Balfour Beatty, who got cold feet and backed out of the deal. Due to this, their portfolio of subsidiaries grew to span aviation, education, health care and defence. Dividend traps coupled with complex long-term contracts meant that their statements seemed sound and backed by cash flow. Although this was not the case, their thin operatingmargins and build up of troublesome contracts, with mention to Qatar which created over
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