An Analysis of Corporate Financial Statements: Uses and Limitations

This report delves into the realm of corporate financial statements, meticulously examining their core components, applications, and inherent constraints. It begins by establishing a foundational understanding of accounting principles and the pivotal role they play in the accurate and reliable representation of financial data, referencing GAAP, IFRS, and IASB guidelines. The report elucidates the purpose, aim, methodology, and scope of the study, while acknowledging its limitations. It proceeds to define financial statements, highlighting their significance in providing stakeholders with insights into a company's financial performance. The uses of accounting data are explored, emphasizing its role in effective financial management and informed decision-making. The advantages and disadvantages of financial statements are critically assessed, followed by a detailed examination of their key characteristics, including relevance, reliability, comparability, and consistency. Furthermore, the report provides definitions of ten essential accounting concepts, such as the money measurement concept, dual aspect concept, accounting period concept, business entity concept, going concern concept, cost concept, and matching concept. The report concludes with recommendations and a comprehensive overview of the subject matter.

Corporate financial statements, their uses
and their limitations

TABLE OF CONTENTS
INTRODUCTION.......................................................................................................................3
1.1 Purpose..............................................................................................................................3
1.2 Aim:...................................................................................................................................3
1.3 Methodology.....................................................................................................................3
1.4 Scope.................................................................................................................................3
1.5 Limitations........................................................................................................................4
WHAT IS ACCOUNTING.........................................................................................................4
Defining F/S (Financial Statements).......................................................................................4
Uses of Accounting Data........................................................................................................4
Advantages/ Disadvantages of F/S..........................................................................................4
Characteristics of financial statements....................................................................................5
Defining 10 Accounting Concepts..........................................................................................6
RECOMMENDATIONS..........................................................................................................10
CONCLUSION.........................................................................................................................10
REFERENCES.........................................................................................................................11

INTRODUCTION
The organization need to assess accounting information according to the concepts and
principles which are provided and guided by the accounting professional bodies. The concepts
like going concern, cost concept, realization concept etc. are essential to exhibit the
correctness and reliability of the financial statements (Flamholtz , 2012). Without applying
accounting concepts in practice, firm cannot show their financial statements accurately.
1.1 Purpose
In the recent times, all the business units are placing high level of emphasis on
preparing statements with the motive to get information about their financial performance. In
this, present report will shed light on the accounting rules and concepts mentioned in GAAP,
IFRS & IASB. Besides this, the main motive of the current study is to analyze the use,
advantages and disadvantages of financial statements.
1.2 Aim:
The main objective behind the present study is to assess the significance of accounting
principles and concept in developing financial statements.
1.3 Methodology
In order to present the fair view of study and attaining aim books, journals as well as
scholarly articles which are related to accounting have been evaluated (Yunna and Yisheng,
2014). Hence, by using secondary data sources use of accounting concepts in the preparation
of financial statement has identified.
1.4 Scope
Scope of the present study is wide as it includes several aspects pertaining to
accounting such as IASB, GAAP& IFRS. Besides this, it also presents the extent to which
financial statements offer benefit to the firm (Ruggles , 2014). Thus, by using such study
other scholars and business unit can identify the level to which financial statement preparation
is vital.

1.5 Limitations
In the present study, only theoretical findings are involved pertaining to use, benefits
and drawbacks of financial statements. In this, no figures are involved in relation to specific
organization to support findings which in turn considered as one of the major limitations.
However, to resolve such issue examples of accounting concepts have been included.
WHAT IS ACCOUNTING
Defining F/S (Financial Statements)
Financial statements (F/S) may be served as a formal record of business activities
which in turn helps stakeholders in getting deeper insight about the monetary performance of
firm. Balance sheet, income and cash flow statement are the main financial statements which
are prepared by business units at the end of accounting year. Besides this, firms also prepare
statement of changes in equity to assess or evaluate shareholder’s equity (Delen, Kuzey, and
Uyar, 2013).
Uses of Accounting Data
Accounting data is highly significant which provides assistance to the business unit in
managing monetary performance more effectively and efficiently. Along with this, accounting
information also helps in creating competent budget or financial framework for the upcoming
time period. Hence, accounting information helps company in taking suitable or profitable
business and investment decisions that aid in organizational success.
Advantages/ Disadvantages of F/S
Advantages: Financial statements enable firm to evaluate its monetary position and
performance over the years. Besides this, F/S also assists firm in comparing its financial
position over their competitors.
Disadvantages: F/S does not provide high level of assistance in developing strategic
and competent framework. The rationale behind this, economic and business conditions differ
significantly in each year (Hoyle, Schaefer and Doupnik, 2015). This in turn places direct
impact on business policies and competitor’s analysis.

Characteristics of financial statements
Relevant: For making suitable decisions in relation to the future, stakeholders make
assessment of or undertake financial statements. Thus, information contained in financial
statements must be according to the need of users. Along with this, F/S also involves
information about omission or misstatement which in turn has direct impact on the decision-
making aspect of users (Vogel, 2014). For example: Accountant should include information
after evaluating each figure in against to voucher.
Reliable: F/S must be free from material error, biasness and misleading aspects. The
reason behind this is, by considering financial statements as base, stakeholders such as
investors, suppliers etc. take further decision (Relevance and Reliability, 2017). Thus, in F/S,
information should be clearly and faithfully represented by including the substances of events,
estimates as well as uncertainties. For instance: By undertaking evidences accountant record
expenses as well as income and thereby avoids the level of biasness.
Comparable: At the time of preparing financial statement company should follow
global accounting principles such as IFRS. This in turn helps firm in preparing suitable
statement which can be compared with other organizations. Comparability is one of the main
characteristics of financial statements which help business unit in assessing its position and
performance over its rivals. Also, results or financial information must be comparable with
statements of other accounting periods as well. This in turn helps stakeholders identifying
financial trend, performance and position (Characteristics of a Good Financial Statement,
2017). Along with this, for ensuring the aspect of comparability, business units require
undertaking similar method of evaluation which is considered by the industry. This in turn
enables firm to identify own position in the industry over others and thereby take strategic
measure for improvement. For instance: By following similar rules pertaining to depreciation
accountant can make the statements comparable.
Consistent: Accounting statements must be consistent and business unit should focus
on preparing financial statements and reports on regular basis i.e. quarterly, half yearly,
annually etc. Moreover, in the absence of having consistent reports firm would not become
able to compare its performance over the past years (Babalola and Abiola, 2013). For

instance: By preparing financial statements each year such 2014, 2015 and so on accountant
can ensure high level of consistency.
Defining 10 Accounting Concepts
1. Money measurement concept: In accordance with such concept, transactions can be
presented in monetary terms must be recorded in accounting books. Hence, by
considering such aspect, it can be presented that accounting books and records contain
quantitative information rather than qualitative. IASB is professional body operates to
provide standards to accountants so that they may apply to their practices. It guides the
accountants to attain transparency and clarity in their practices. It regulates and help
accountants to make effective interpretation of results. All the above accounting
bodies are formed so that accountants may strictly follow ethical and technical
standards. They all monitor the performances of professionals. This body requires that
expenses and income must only be realized in financial statements if its cost may be
measured with adequate liability. For example, organization decides to set asset at the
rate of 5 % annually on depreciation.
2. Dual aspect concept: On the basis of such aspect, each business transaction must be
recorded in two different accounts. This in turn helps accounting personnel in
producing reliable financial statements (What is Dual Aspect Concept? Explanation
with Example, 2017). Such concept can be understood on the basis of following
equation:
Total Assets = Total Liabilities
Total Assets = Capital + Outsiders’ liabilities
Capital = Total Assets – Outsiders’ liabilities.
For instance: Machinery worth of $200000 is purchased by business entity against
cash. In such transaction, two accounts are majorly affected such as cash and machinery. As
per the duality principle or concept, amount of machinery (fixed asset’s element) will increase
with $200000. On the other side, due to making investment in fixed asset cash will decline by
$200000. This aspect clearly shows that each transaction has significant impact on two
accounts.

3. Accounting period concept: Such principle states that accounting information must be
related with specific time period such as 6 months and 1 year. GAAP regulates and
guides accountants to be effective in their work and follow the principles of
accounting in efficient way. The GAAP is a professional accounting body which laid
down the rules and regulations and procedures to be followed by the accountants in
their day to day practice. It laid down the accounting standards to be applied by the
accountants. This body requires that books of accounts of business must be closed
every year to evaluate the performance of it. Accounting period concept means that
the life of business is further divided into a definite series of short accounting periods
of aforesaid lengths for analyzing the results shown by the organization (Humpherys
and et.al, 2011). Example, January to March is taken as quarter, while accounting
period for tax reporting is taken as January to December of 12 months.
4. Business entity concept: This concept states that accounting transactions related to the
business must be recorded apart from that transactions of the owners. Business entity
concept states that only those events should be taken in account which has the impact
on business and not the owners transactions be taken. This is essential concept because
transactions of business with that of owner will be mixed, then accounting information
will lose its usability. Through GAAP guidelines, organization uses it to properly
organize its financial information into accounting records, summarizing the
accounting information to financial statements and draw out the supportive
information (Phillips, and Graeff, 2014). GAAP also considers that business and
owner are separate from each other Example, Mr Richard has acquired 4 halls in a
building for 2000 per month on rent. He uses two for his personal use and remaining
two for business purpose. According to business concept, only 1000 is valid expense
of the business.
5. Going concern concept: Going concern concept states that business will be running
for longer period. It will go to the long run in its survival. According to this aspect,
financial statements are prepared for the business. Business will go on indefinite
period as such financial statements are summarized and prepared accordingly.
Example, company is in serious trouble and is unable to pay its obligations to the
creditors (Edmonds and et.al, 2016). It provides clarity to accountants and to the

organization for effective summarizing and interpretation of accounting information
with reference to the accounting standards provided by GAAP. According to this
body, business will be continued for indefinite period. The government provides
bailout and guarantee of the payments to the creditors. The company is a going
concern despite of having weak position regarding paying off liabilities concern.
Another example, if firm is on urge of bankruptcy, it has to sell its inventory at fire
sale prices not at market prices, then its assets will be valued differently whether it is
going concern or not. The company should take same accounting concept for several
years so that it can have clarity and accuracy in several future years.
6. Cost concept: Cost concept states that assets and liabilities of the business should be
presented in the accounting records at their historical cost or original cost of accruing
or purchase of it. This means that assets of the business must be shown in the records
as per the original cost of acquiring or purchasing it. This is also known as historical
cost concept. IFRS is professional body which prescribes the international accounting
standards which states that how particular type of transactions and other type of events
should be recorded in financial statements. This body helps accountants to prepare
financial statements. IFRS states that assets and liabilities must be presented at
historical cost only. It specifies how exactly accountants must maintain their accounts
and report. This is taken at the historical cost because the current value of the asset
differs than the original cost of the asset. Example, a company has constructed an
apartment at a cost of 45000 on 2010. Today, fair market value of the building is
65000 but still stands on the balance sheet at its original cost i.e 45000.
7. Matching concept: Matching concept states that expenses should be recorded only
when revenues are generated from those expenses. It means that expenses should be
recorded when from it, revenues has been obtained. So that, expenses and revenues are
matched perfectly in the accounting records information (Peters and et.al, 2014). This
matches expenses and revenues in an accounting period. IFRS specifies how exactly
accountants must maintain their accounts and report. IFRS is based on universal
language that could be understood by accountants worldwide. The main of the body is
to maintain stability and transparency in the financial world for reliability of
accounting information (Tsalavoutas, André and Evans, 2012). This gives clarity to

investors and businesses to make educated and good decisions which provide them
high return. IFRS states that expenses should be recorded only when income is
received from it. Example, kitchen appliances company purchases large appliances
from the wholesaler for 7000 and then resells it to restaurant for 10,000. At the end of
period, company should match the 7000 cost with the 10,000 revenue (Liu, Liang and
Wang, 2015). Hence, cost of appliances are matched with the revenue of it. The
company should charge depreciation on same method in current year as well as for the
next consecutive years.
8. Realization concept: Realization concept states that revenue is recognized by the
business when it is earned irrespective of whether cash from the transaction has been
received or not. This assumption is based on the principle that seller of the goods
records its earning irrespective of cash received or not by him from the buyer.
Example, Volkswagen company receives order from the customers for advance
booking of car against 10 % down payment. It delivers car to the customers within 20
days upon which it receives 90 % of the list price.
9. Convention of conservatism: This convention of accounting states that anticipate no
profit but all losses a business might occur (Matherly and Burney, 2013). This is
because future is full of uncertainties. Future has fluctuations to the life of business.
The consequences of less error statements is much less than of more error statements.
IASB is an independent private body that approves IFRS. It operates under the
oversight of IFRS. It has a role and responsibility for technical matters in accounting
information. All the accounting rules, regulations, methods, procedure and standards
are being amended by it. The IASB board guides the accountants regarding their day
to day practice by which they can attain effectiveness in their accounting practices.
This body states that in convention of conservatism, profit should not be anticipated
but losses should be. This will provide business clear picture as it works in dynamic
environment which fluctuates and at any time, deviations may occur. For instance,
closing stock of business is valued at market price or cost whichever is lower. This
convention of business is playing safe about the uncertainties. Better position of
business is not permitted than what actual it is and vice versa is also not permitted.

Another example is that profit should not be overestimated, value of liability should
not be underestimated.
10. Convention of materiality: Materiality convention states that if the disclosure or non
disclosure of business information might influence the decisions of users of financial
statements, then the information must be disclosed in the manner which affects the
decisions of the users of information (Jollands and et.al., 2017). Company must
disclosed the information which might affect the decision of the user of the financial
information. Example, a company 's financial report just ended, then different versions
of the statements can be served to the users or audience for different purposes.
RECOMMENDATIONS
Hereby, it can be recommended that accounting concepts play an important role in
accounting field to accountants. But the GAAP based income statements often lead to
distortions and confusion to the accountants. It is recommended that these principles must be
evaluated by the professional body so that accountants may not do the work twice, it leads to
wastage of time. As such, the guidelines should be assessed by the body before implementing
to organization. Instead, IFRS is growing and accountants are applying the guidelines as
financial reporting is quite effectively attained by it. It provides clear guidelines to them.
CONCLUSION
Hereby it can be concluded that organization need to have complete and accurate
accounting information to have an eye to track its expenses. Expenses can be tracked well by
the organization and it should be marched with the revenues from the expenses it has
generated. For accurate and complete information, certain accounting concepts and
conventions are prescribed by GAAP, IASB, IFRS bodies to help accountants in gaining
knowledge of it and applying those procedures with the accounting standards provided and
guided by them to ensure healthy interpretation of accounting information in effective way
which exhibits true picture of the enterprise. Financial statements like balance sheets, income
statements show true status of firm because of the accounting standards provided by the

aforesaid professional bodies which help accountants to be fair enough to exhibit the
accounting information in accurate manner which helps investors to make decisions regarding
credibility of the organization whether to invest in it or not.

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