Financial Reporting: Concepts and Assumptions

This assignment delves into the essential principles of financial reporting, covering key concepts such as inventory, accounting assumptions like economic entities, going concern, monetary unit, periodicity, and accrual basis. It also discusses the significance of financial reports for both internal and external parties, including stakeholders like creditors, customers, and government, in making informed decisions about investment or withdrawal.

Financial Reporting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
TASK 2............................................................................................................................................2
CONCLUSION................................................................................................................................3
REFRENCES..................................................................................................................................1

INTRODUCTION
Financial reporting refer to the disclosure of financial statement for the external party of
organisation that include all the stakeholders such as regulator or investor who so ever is
interested in financial reporting of company. It basically reflect the financial position as well as
performance of company that helps various stakeholder to take effective decision (Nobes, 2014).
TASK 1
Conceptual Framework
Financial reporting conceptual framework was published by IASB that is International
Accounting Standard Board which is based on the consistent concept. It include the definition as
well as guidelines on various concepts. Like, it include the authentic definitions related to assets
and liability of company whereas guidelines are based on various concept such as disclosure of
financial statement, measurement, recognition and so on. Moreover, based on approaches it
address various issues due to which it help in preparation of financial statement to understand the
uses, concept, limitation as well as purpose wisely. Thus, consideration of such framework help
in making appropriate decision by proper presentation of all accounting information.
Objective of financial reporting
As per IASB the objective as well as purpose of financial reporting are stated below
(Flower, 2018):
 It provide valuable information to organisation that finally helps in setting plans,
analysing the analysis, setting attainable benchmark and make effective decision.
 Along with that it assist external shareholders to gain the information about the company
which finally helps them to make rational decision regarding investment and extension of
credit.
 Moreover, it provide information regarding cash inflow or outflow that help overall
organisation to identify the revenue generated by company, as well as actual liquidity of
company.
Fundamental Concept
The primary purpose fundamental concept of financial reporting is to depict true position
of company by disclosing the financial statement of company. Thus, it act as a data for its
multiple users that is utilised by them to gain favourable result. In addition to it, company with
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less liability and debt attract more investor. Thus, all the asset as well as liabilities of company
are measured uniformly before presenting it in financial statement.
Fundamental Quality
 Relevance: Relevance is an essential part of fundamental quality that define that all the
items within the financial reporting add value to the financial statement as well as
strength of company within financial year. Thus, showcasing the items in financial
statement assist user to make effective decision.
 Faithful Representation: It plays a vital role as all the information which are stated in
annual report must be complete, neutrality as well as error free. It depict actual position
of company based on various item such as asset, liability, income as well as expenses.
 Enhancing Qualities: Enhancing qualities is a part of financial quality which includes
preparation of financial reporting in such as manner it create good understanding level
between user of financial information as well as company. Along with that even the
company make better comparison by comparing their financial statement with its
competitors which are prepared for given financial year.
TASK 2
Accounting Concept
Recognition concept: Recognition concept that all the financial statement and profit and
loss account include the financial transaction of business. This helps in recognising the total
revenue as well as expenses incurred by business.
Measurement concept: Business only record monetary or financial transaction that can
be expressed in term of money. Though non monetary or qualitative data is significant to
conduct data to day transaction but while preparation financial statement business gives
importance to only quantitative data.
Disclosure concept: Within disclosure concept business needs to provide all the relevant
information within its financial statement whether it is related to its liability or debt. This help
the user to gain relevant information about the income or expenses bear by company.
Accounting assumption
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Economic entities: According to economic entity the transaction of business entity are
different from its owner. As there are various division due to which each division must prepare
separate accounting record to perform the operations of business.
Going concern: According to this assumption a business will perform its operations with
the motive to perform its operations for foreseeable future. Thus, business perform all its
functions like raising fund from market and so on with the purpose not to wind up its operations
in near future.
Monetary unit: Monetary unit assumes that business will, only record all those
transaction which can be represented in term of money. Thus, financial statement of company
only record financial as well as monetary transaction.
Periodicity: Periodicity assumption state that business dive its activity based on the
specific time period like monthly or quarterly. This help business to depict actual position as well
as performance for its shareholders such as creditors or investors.
Accrual basis: All the transaction of business whether related to expenses or income are
recorded at the time they were incurred.
Inventory
Inventory refer to the stock of company that basically generate funds for the company.
Business record all the transaction related of its inventory whether its is related to purchase,
sales, purchase return, sales return, credit sale and purchase. Thus, every year it is presented in
form of opening as well closing stock. Additionally, the stock left at the end of one accounting
year is carried forward as a opening stock of another accounting year. This is based on the
accounting concept of going concern that is based on the assumption that business start its
operations with the objective of carrying it forward for long lasting. Thus, due to this principle
the amount on inventory is carried forward.
CONCLUSION
From the above report it has been demonstrated that financial reporting is based on the
several concept and assumption. It present all the relevant financial data for its interested
stakeholders like creditor, customer and government so that they can formulate better decision
regarding investment or withdrawal of investment from the company. Thus, financial report
serves various benefit not only top external party but internal party as well such as it depict the
information related to cash flow or liquidity of company.
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REFRENCES
Books & Journals
Nobes, C., 2014. International classification of financial reporting. Routledge.
Flower, J., 2018. Global financial reporting. Macmillan International Higher Education.
Jung, B., Lee, W. J. and Weber, D. P., 2014. Financial reporting quality and labor investment
efficiency. Contemporary accounting research. 31(4). pp.1047-1076.
Kim, J. B. and Zhang, L., 2014. Financial reporting opacity and expected crash risk: Evidence
from implied volatility smirks. Contemporary Accounting Research. 31(3). pp.851-875.