Financial Information: Nature, Use, Conventions, and Frameworks

This report delves into the nature and use of financial information, emphasizing its importance for assessing an organization's financial position, making informed decisions, and managing risk. It explores the need for financial information, its purposes, limitations, and the main stakeholders involved. The report identifies various sources of financial information, differentiating between internal and external reports, and examines the role of financial statements like balance sheets, income statements, and cash flow statements. Furthermore, it identifies accounting arrangements and conventions, including monetary measurement, separate entity, realization, and materiality. The report also discusses accounting frameworks and regulations, specifically GAAP and IASB, highlighting their influence on accounting and financial arrangements. Finally, it explains methods for appraising investment projects, including the accounting rate of return, payback period, and net present value, providing calculations to illustrate each method.

TASK 1 : EXPLORE THE NATURE AND USE OF FINANCIAL
INFORMATION
1.1: Discuss the need for financial information, its purposes, limitations
and the main stakeholders interested in the information
Need for financial information in an organization:
 Assessing the finance requirements
The organization needs finance in many areas includes the following, in order to run
the business the company may require a working capital of 100,000$. In purchasing
the physical resources the company might have to spend approximately between
800,000 and 1,000,000. Since the company has established newly, company have
to recruit people by conducting interviews, to let people know about the interview
the organization has to do advertising on newspapers, social media, T.V etc. for
which it might cost around 25000$.
 Obtaining Finance
There are many sources to obtain finance to the company. Personal savings can be
added to finance required by the company. Can borrow some money from the social
circle and for the remaining money company can arrange a bank loan by submitting
the documents required by the banks. In case if the company is not able to borrow
loan from bank as a substitute the company can check with Angel investors or
Venture capitalists.
 Reporting to owners/ shareholders/ stakeholders
According to the standard pattern financial report will be reported on regular basis
so that owners will know about the status of the company.
 Setting and meeting targets / Appraising new projects
Company must have set of targets to achieve, such as paying off all the debts in
time, catch more customers, open new branches in other states, and etc. Once the
company is clear from all the debts, organization can think of setting up new
branches in different cities

 Managing risk
Company must always have an alternative option if anything goes wrong within the
organization. Company must always keep a part of profit separate in order to use it
when required the most.
 Internal versus, external need
Internal versus of the company are paying wages, electricity bills, rent, buying new
machineries and etc.
External includes paying taxes, hired lecturers, rented services and etc.
SOURCES OF FINANCIAL INFORMATION
 INTERNAL
FINANCIAL REPORTS
A firm or an investor needs to know about financial strength stability and
growth about a company where he wants to invest or do any business
activity. There are number of options available to that person or company.
Income tax returns
Income tax return is 1 of the sources of financial information, different
countries/economy has rate for income tax ranging from 3% to 40%. For
examples in Pakistan charges only 3.5% of tax where as in Australia it`s 40%.
Income tax is direct measure or indicator of a company`s earning.
Press release by the company
It`s an official news issued for the public through media. Company or
organizations release in order to be transparent and they want to keep the
public updated.
(find examples)
Audit reports
Define or explain what`s audit
In Audit report a company`s annual reports will be given, with the help of
these information we can do comparison between other companies and being
well aware where to invest.
Payroll
By looking at payroll reports we can know how many staffs are working in a
company. If a company have around five hundred staff, we can come to a
collusion that it`s huge company which might have good profit.

 EXTERNAL
External reports are those reports where firm or individual does not contact
the target organization directly.
Media reports
Reports are published about companies without the involvement of any
particular company. Media search for news about organizations and take it to
people and make them aware about the company`s situation weather they
are in good position or in bad.
Information from venders
Venders are those people who provide goods and service to the company.
Talking to venders will give a very clear idea about the company, if the
venders business is going well with the company we can assume that the
company business as well is in good condition. Where if the venders business
is dull with a particular organization, the company`s business as well will be
low.
Budget announcement by companies
In the annual budget of different government department the news about
these allocated funds is announced publicly. So all the concerned
organizations they can plan in order to take their due share because now
they know that the said department of the government is likely to do
purchases in upcoming financial year.
Financial Information:
Financial statement of an enterprise include the following:
1. Balance sheet
2. Income statement
3. Cash flow statement
4. Statement of changes in owner`s equity or stockholder`s equity.
PURPOSE AND REQUIRMENT FOR FINANCIAL REQUIREMENTS
1. Legal requirements:

If the company is registered in stock exchange the financial reports must be
arranged according to the law of the country because there is the need for
audit and proper signed balance sheet. To renew the license, contracts and
agreements properly managed records are important.
2. Tax requirements:
Legal documents are very important for taxation because these are approved
by recognized accountants. Fraud documents do not show the exact profit, so
tax department will have doubt on the company.
Limitations of financial information
 Transactions are initially recorded at the cost of purchased. This is an issue
when checking the balance sheet, where there will be changes in the value of
goods and liabilities over the time. Few items like marketable securities are
modified in order to match the changes in the market value. But other items
like fixed assets do not change. There for the balance sheet can mislead if a
large part of amount is stated on the historical cost.
 If the inflation rate is comparatively high, the amount related with the assets
and liabilities in the balance sheet will appear low. Since they were not
adjusted on inflations. This mostly applies to long term assets.
 There is a chance to fraud on the reports. The management team
deliberately may change the results presented. This mostly happens when
there is pressure to show excellent report, for example there will be bonus
added to salary if the sales ratio goes high.
Main Users/stakeholders interested in the financial information
The main users (stake holders) of financial reports are commonly grouped as
follows: potential investors and investors are mainly interested in their security of
the investment and profit. Upcoming profits may be valued from the rival
company`s growth
Few most important customers are as follows:
1. Customers
2. Employees
3. Shareholders
4. Suppliers, distributors
5. The local community

1.2 Identify accounting arrangements and conventions used by
organizations.
Accounting Conventions:
An accounting convention is a common practice used as a principle when recording
a business transection. It`s literally used when there is no preferred guideline in the
accounting standards to maintain a specific situation.
Monetary Measurement:
Accountants are not able to account for items which are not in monetary terms.
Every recorded transection is measured in terms of money (local currency).
Separate Entity:
This convention attempt to confirm that private transactions and matters relating
to the owners of the business are divided from transections that relate to business.
Realization:
According to this concept, profit is mentioned only when it is earned. Advance
payments are not considered until unless the service or goods have been delivered
to the customer.
Materiality:
It means all materials have to be recorded in accounting. Accountants have to
record all the important information and avoid the unnecessary things. Materiality
concept is important for auditors and financial accounts.

TASK-2
AC 2.1 Accounting frameworks and regulation influence accounting and
financial arrangements.
 GAAP
GAAP (Generally accepted accounting principles) includes industry specific rules,
definitions of concepts and principle. GAAP are the rules of accounting which is used
to prepare standardize the reporting of financial statements like balance sheet,
income statement and cash flow statements. GAAP is useful in making economic
decisions about an organization. GAAP ensures that financial reports are
transparent and consistent from other organizations.
Basic principles that make these standards are as follows:
1. The business as a single entity concept
A business is a different operation in the eyes of law. All it`s works are
treated separately from its owner. According to law a business can exist long
after the existence of its founder or owners.
2. The specific currency principle
A currency is fixed to report the financial statements. In America all the
statements has to be recorded in US dollars. The company has which has
branches in different foreign countries has to convert their currency to US
dollars using the exchange rate while reporting the financial statement.
3. The specific time period concept
Financial reports are always related to a specific time. Every income report
has its start date and end date. Balance sheets are presented on particular
date. This way the readers know when the business transactions have
happened.
4. The historical cost principle

Old costs are recorded for valuing the items. The prices at which the things
are bought and sold are used for valuation. Real values are changed during
inflations and recession, but these are not considered while reporting.
5. The non-death principle of businesses
The accounting principle assume that the business have no end date.
 IASB
IASB was first known as International accounting standards committee (IASC), later
IASB took over in April 2001.
IASC was established in the year 1973 and had both authority and responsibility to
issue international accounting standards. In April 2001 IASB took over all the
responsibilities for international financial reporting it also took IASC`s all standards.
IASB have 14 board members where one of them is appointed as the chair and one
as the vice chair. IASB members are usually appointed for a period of five years.
The agreement is also renewable once for a period of three years. Current chairman
of IASB is Hans Hoogervorst and vice Chairman is Sue Liyod.
Board members are assigned from different parts of world where four members
assigned from Asia/Oceania region, Europe, Americas and one from Africa and one
from any area are appointed to ensure a broad international diversity.
Professional competence and practical experience are the main qualifications for
membership.
IASB`s role:
1. Shows full care in developing and chasing its technical agenda, related to
certain requirements with public and administrative.
2. Issuing and preparation of IFRSs and submission of drafts.

3. They approve and issue the interpretations developed by the committee of
IFRS interpretation.
TASK 3
1. Explain the methods for appraising investment projects (AC 2.3)
The directors have the opportunity to invest in a new project. This involves the
acquisition of new machinery. The figures for the project are shown in the table
below.
Cost of Machine 10,000
Estimated Life 5 years
Estimated future cash flows:
Year 1 2,000
Year 2 3,000
Year 3 3,000
Year 4 5,000
Year 5 5,000
Estimated residual value 3000
For the project, calculate the accounting rate of return and the payback period.
Payback period = A + |B|/C
YEAR INVESMENT PROFIT
0 10000 (10000)
1 2000 -8000
2 3000 -5000
3 3000 -2000
4 5000 3000
5 5000 8000
Pay pack period = 3+ 2000 / 5000 = 3.4
 Accounting rate of return = average profit/average investment X 100
Cash flows = C0 C1 C2 C3 C4 C5

Depreciation = Initial cost – residual value/Number of useful years
=10000-3000/5 = 7/5= 1.4
C0 C1 C2 C3 C4 C5
Cash flow 10000
Cash inflow 2000 3000 3000 5000 5000
Depreciation 1400 1400 1400 1400 1400+3000
Total Cash flow 600 1600 1600 3600 6600
Average cash flow = 600+1600+1600+3600+6600/5 = 3880
Accounting return rate = 3880/10000 X 100 = 38.8
Net Present Value
Net present value means the difference between the value of present cash inflow
and cash outflow. Net present value is used for capital budgeting and for
investment planning to check the profitability in new investment or project.
NPV = (c)+ c1/(1+r) + c2/(1+r)2 + c3/(1+r)3 + c4/(1+r)4 + c5(1+r)5 + c n/(1+r)n
If the final sum is:
 +, Recommend
 -, Do not recommend
 Zero, remain indifferent
10% of interest rate must be given by default if the rate is not mentioned.
Below sum is done using the previous question.
NPV = (c)+ c1/(1+r) + c2/(1+r)2 + c3/(1+r)3 + c4/(1+r)4 + c5(1+r)5 + c n/(1+r)n
NPV = (10000) + 2000/ (1+10%) + 3000+/ (1+10%)2 + 3000/(1+10%)3 +
5000/(1+10%)4 + 5000/(1+10%)5
= (10000) + 1818.18 + 2479.33 + 2254 + 3425 + 3105
= 3081.51
Since the final result ended up in positive, I recommend to move further.
SP = standard price,
SQ = actual price,
AQ = actual quantity
Material usage variance
Standard price = SQ X (SQ – AQ)
20 X (1100 – 1175)
-(1500) Adverse

Direct material price variance = (SP – AP) X AQ
= (20 – 23260/1175) X 1175
= (20 – 19.80) X 1175
= 240
Direct labour efficiency = (SH – AH) x SR
= (1100 - 1075) x 22
= (25) x 22
= 550
Direct labour variance = (SR-AR) x AH
= (22 – 24420/1075) x 1075
= (22-22.7) x 1075
= -770 Adverse