Financial Reporting: Framework, Analysis, and Benefits Report

This report provides a detailed overview of financial reporting, starting with its definition and purposes, including providing information to stakeholders, evaluating data, and supporting decision-making. It explores both regulatory and conceptual frameworks, emphasizing qualitative characteristi...Read More

Financial Reporting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO 1.................................................................................................................................................1
P 1 Meaning of financial reporting with the various purposes and regulatory and conceptual
framework...................................................................................................................................1
P 2 Purpose of financial reporting meeting the organization objective and goals......................5
LO 2.................................................................................................................................................6
P 3 Interpretation of financial information..................................................................................6
P 4 Evaluation of organization performance with different ratios..............................................6
LO 3 ................................................................................................................................................9
P 5 Benefits of International Accounting Standards (IAS) and International Financial
Reporting Standards (IFRS) .......................................................................................................9
P 6 Models of financial reporting and auditing ........................................................................10
LO 4...............................................................................................................................................11
P 7 Variation and importance of financial reporting.................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial reporting refers to disclose the financial data and results related to the company
performance to the different stakeholders such as investors, customers, creditors, employees etc.
in the company. Financial reporting provides the various monetary and non-monetary
information to the organization to evaluate the financial result and help the different stakeholders
to make effective decision regarding the investment and improving productivity and profitability
of the company. It helps the company to get the results of the company in particular time period.
The report highlights the various purpose of financial reporting ion the organization and different
regulatory and conceptual framework to present the data and information in prescribed formate.
The report explains the use of different financial statements such as balance sheet, profit and loss
account, trading account and cash flow to evaluate the performance of the company.
It provides the importance of ratios in the organization to evaluate performance with the
other companies. The ratio analyse help the company to find the performance and productivity of
the company by comparing the results to different year results. The report also highlights the
benefits of IAS ans IFRS in the company and importance of financial reporting across the
different countries. The accounting standard provide general guidelines to the company to
present the data ion more precise form to improve the understandability of the data.
LO 1
P 1 Meaning of financial reporting with the various purposes and regulatory and conceptual
framework
Meaning : Financial reporting refers to present and disclose all the data related to finance
of the company in more precise format under the guidance of accounting concept and principle
to the different users who have interest in financial information (Mazur, and Pisarski, 2015). It
includes the various statements such as balance sheet, profit and loss account, income statements,
cash flow etc. to present the data and evaluate them to get the effective and efficient financial
result.
Purpose of financial reporting
Providing information : The aim of preparing financial report in the organization to
provide the different kinds of information to the different users and stakeholders so they can get
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the benefits from the information. The various financial report provide t eh different information.
For example cash flow statements help the company to evaluate the total inflow and outflow of
cash in particular accounting period to meet the requirement of the company and balance sheet
statement are prepared to provide the information related to the financial position such as total
debtor and creditor, assets, liability etc. to help the investor to take the investment decision. The
presentation of financial information is also required by the firm to attract the customer and pool
the investor toward the company outputs.
Evaluating data : Financial reports provide the information to the company to evaluate
the performance to take effective decisions. The comparison of financial report to the different
accounting year and to compare the performance of one company to the other company. It helps
them to find position in the market in compare to other company in same industry and
understood the trend in the market to improve the performance and productivity of the company.
Decision making : Financial report provides the relevant data to the different
stakeholders such as investor, customer, creditors, employees, manager and owner to get the
result of the company and take the decision of investment, purchase and lend money to the
organization (Cardwell,, Williams, and Pyle,, 2017). It increases the productivity of company
with the profitability. The financial information such as revenue, profit and expenses of the
accounting period help the investor to make the decision regarding whether to invest in the
company or not. A sound financial growth pool the investor towards the company.
Conceptual framework and regulatory framework
Regulatory framework : The regulatory framework provides the set of rules and
regulation for treatment of accounting data and values. The framework provides various standard
to measure the performance and provide a fixed set of standard for the valuation of company data
to take the important decisions.
The purpose of regulatory framework is help the company in preparation of financial
statement because they are used by the different users. It strengthens the accountability and
creditability of the organization by using different accounting standard such as IFRS, IAS etc.
Conceptual framework : It is used by the organization to describe the nature and
objective of financial statement and accounting and set the limit of accounting to present the
information accurately and correctly (What is Conceptual Framework?, 2019). It explains the
fundamental principles and interrelated objectives.
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The purpose of conceptual framework is to use the accounting standard and GAAP
(General accepted accounting principle) to attain the organization objective and goal. Company
use the accounting principles to solve the major issues in the organization. It helps the
accountancy firm to prepare the accounts for audit and suggest them for valuable improvement.
Qualitative characteristics
Fundamental qualitative characteristics
Relevance : It refers to provide the relevant information to the users to minimize the
errors in decision making. The relevant information influence the investor and lenders to invest
in the organization. It also helps to the customer by provide the more accurate and predictive
value. Predictive value help the users to evaluate the past, present and future information.
Faithfulness : The faithfulness of information help the customer to evaluate the data and
make them more reliable on the information. Faithful information present the accurate financial
data in different reports and make them more comparable. The accountancy firm consider
providing faithful information to gain the trust of stakeholders.
Enhancing Qualitative characteristics
Verifiability : verifiability of data can be direct of indirect. Direct verifiability of data
refers to verify the data by direct observation and control them on regular basis. On the other
hand indirect verifiability of refers to evaluate and measure the data by using same methodology.
It helps the organization to provide the accurate data to the users (Otley , 2016).
Comparability : It helps the company to compare the financial statements such as
balance sheet, profit and loss account etc. organization can compare the one year financial data
to the other year financial data and help them to evaluate the financial position of the
organization in respect to other organization in same industry. The evaluation elaborate the
position of company in market.
Understandability : It refers to present the data in more precise form. It helps the user to
understand the meaning of the data and get information from the data for different purpose. It
depends upon the way of presentation and the capability of the users to understand them
properly. The aim of the concept is to present the financial reports in more simple form so the
user can evaluate the real meaning of the information and decide whether to invest in the
company or not.
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Reliability : Reliability refers to present the data in more accurate way by using the
various accounting standard such as GAAP, IFRS and IAS. The accounting principle and
standard make the data more reliable and help the users to take the useful decisions. The
reliability if the data and information attract the customer and investor.
Different stakeholders in the company
Internal stakeholder
Manager : Manager use the financial information to prepare the financial statements
such as balance sheet, income statements, cash flow etc. to evaluate the data and present them in
more precise and understandable form (Schaltegger, and Burritt, ., 2017). The presentation of
data help the user to comes on the conclusion of investment, purchase of material etc. Further
they require the financial information to evaluate the data and make the decisions to improve the
productivity and profitability of the company.
Employees : Employees have mush interest in the financial position of the company.
They are responsible and accountable for the organisation performance and productivity. They
require the financial information to regulate the performance of the company on different
interval. The different report such as balance sheet, cash budget and capital budget help them to
evaluate the revenue and profit of the company.
External users/stakeholders
Lender : Lender provide finance to the company on specific interest rate. They are
interested in the financial information of the company to evaluate the credit worthiness and
reliability of the company data (Quattrone,, 2016). The good financial position and growth of the
organization pool the lenders toward the company to lend money for improving the performance
and productivity.
Customer : customer are the most influencing stakeholders in the organization. They
influence the manager to minimize the price of the goods and services and provide the qualified
good on reasonable price. Customer are interested in the financial information to evaluate
financial position and make the decision of purchase of goods and services.
Government : Government are more interested in the financial information of the
organization to evaluate the profit and revenue of the company to check the ability of company
to pay the taxes and duties on the goods and services. Government requires the financial
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information to collect the tax and interest from the different organization and also help them to
run their business by providing subsidies and rebates.
Suppliers : They supply the raw material and information to the company on credit and
cash. They are interested in the financial position and information of the company to regulate the
performance and take the decision of providing goods and services on credit (Öztürk, 2017).
They use the information regarding the sales and profit of the organization to evaluate the
financial position.
P 2 Purpose of financial reporting meeting the organization objective and goals
Financial reporting are used by the company to meet the organization objectives and
growth. The various report such as balance sheet, income statements, cash flow, profit and loss
account, ledger, trail balance and budget report are used for different purpose. They help to gain
the profit of the organization and improve the growth. Balance sheet are prepared to present the
assets and liability and the profitability of the company (Ellwood, and Newberry, 2016). The
creditors and debtor are help to evaluate the financial position in particular accounting period.
Cash flow are prepared to regulate the inflow and outflow of the cash. It helps the company to
present the cash and cash equivalent in balance sheet. The purpose of formulating cash flow is to
provide the information regarding the cash receipts, net change in cash and cash payment.
Preparation of financial statement help the company to find the area of rectification.
Financial report provide a base to evaluate the financial data and information and prepare the
more effective and efficient plan for the growth of the business in the market. It attracts the
customer toward the organization by providing better services. The presentation of financial data
reflect the reliability and profitability of the company.
Balance sheet and income statements are used to present the profit, income, revenue, cash
inflow and outflow, assets and liability of the organization. They use the various qualitative
characteristic to prepare the data which make them more reliable and understandable. It helps t
eh stakeholders to relay on the information and take the valuable decisions to improve the
organization performance, productivity and profitability.
LO 2
P 3 Interpretation of financial information
Profit and loss account of Godwin plc company as per 31 December 2018
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Revenue 585100
Cost of sales -403639
Gross profit 181461
Operating Expenses -92139
Operating Profit 89322
Investment Income 9600
Finance cost -1200
Profit before tax 97722
Taxation -9500
Profit for the Year 88222
2. Statements of change in equity
Ordinary
share capital
@ 25 p
Revaluation
reserve
Retained
earning Total
£ £ £ £
Balance as per TB 86700 40000 45500 172200
Profit for the Year 88222 88222
Preference dividend -2500 -2500
Ordinary dividend -4500 -4500
Total Equity 86700 40000 126722 253422
Godwin Plc statements of financials positions as at 31 December 2018
Assets £
Non current assets
Land and property 144062
Plant and equipment 98260
Investment property 28000
Total non current assets 270322
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Current assets
Inventory * 24700
Trade receivables 78000
Total current assets 102700
Total Assets 373022
Equity and liabilities
Equity
Ordinary share capital @ 25p each 86700
Revaluation reserve 40000
Retained earning 126722
Total Equity 253422
Non current liabilities
10% preference share capital of 1 sterling each 26500
Deferred taxation 10000
Total non current liabilities 36500
Current liabilities
trade payables 62700
Tax payables 9500
Bank overdraft 10900
Total current liabilities 83100
Total equity and liabilities 373022
P 4 Evaluation of organization performance with different ratios
Ratio analysis is a quantitative method of presenting the financial information of the organization
and help the users to evaluate the information for various purposes. They are prepared to present
the liquidity, efficiency and profitability of the organization. It helps them to compare the
performance of Tesco with its previous year performance (Li, Sougiannis and Wang, 2017). The
internal and external users such as suppliers, managers, customer use the ratio analysis method to
interpret the financial position of accountancy firm.
Liquidity ratio analysis of Tesco company
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Particulars 2018 2019
Current assets 13600 12570
Current liabilities 19233 20680
Inventory 2264 2617
Prepaid expenses
Quick assets 11336 9953
Current ratio Current assets / current liabilities 0.70 0.60
Quick ratio
Current assets - (stock + prepaid
expenses) 0.58 0.48
Interpretation : Liquidity ratio present the liquidity of the organization that the organization is
capable to pay the debt of the company or not. To evaluate the liquidity of the company they
prepare the current ratio and quick ratio. From the above data it can be concluded that Tescco has
to maintain the current ratio of the company because the ideal current ratio is 2 : 1 and here the
ratio is .70 : 1 in 2018 and .60 in 2019 which present that the company current assets is quite low
to pay the short debt of the company. They have to maintain the cash and inventory level in the
organization (Cascino,. and Gassen, J., 2015).
The ideal quick ratio of the organisation is 1: 1 and here the ratio is .58 : 1 in 2018 and .48 in
2019 which present the liability if the company is higher than the quick assets. They have to
control the liability to maintain the quick assets to pay the debt on time.
Solvency ratio analysis of Tesco company
Particulars 2018 2019
Long-term debt 8621 7272
Shareholder's equity 10502 14858
Debt-equity ratio
Long-term debt / shareholders
equity 0.82 0.48
Interpretation : Solvency ratio are also financial leverage ratio. They are used by the
organization to compare the debt of the company to its assets, earning and equity of the
organization in particular accounting period. The above data concludes that the debt equity ratio
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of Tesco is .82 : 1 in 2018 and .48 in 2019. Here the equity of the company is greater than the
debt which represent that the company is able to pay the debt and manage the organization
performance and profitability. If the ratio is greater than 20% which means that the financial
position of Tesco is good and ready to meet the goal and objectives of the company.
Efficiency ratio
Particulars 2018 2019
Cost of goods sold 1496 1475
Average Inventory 3433 4881
Turnover or sales revenue 57493 63911
Average total assets 90737 93931
Average fixed assets 64571 67514
Receivables or debtors 6141 6522
Stock turnover ratio (In times) 21.79 27.87
Total assets turnover ratio 0.63 0.68
Fixed assets turnover ratio 0.89 0.94
Receivables or debtors turnover ratio
(in days) (Debtors * 365) / Credit sales
39
days
37
days
Interpretation : Efficiency ratio is used by the organization to analyse the ability of the
company that the company is able to use the assets and liability of the organization. It compares
the sales of the company to the fixed assets to evaluate that the company is able to use the long
term resource. From the above table it can be concluded that the total asset turnover ratio of the
organization in 2018 is .63 and in 2019 is .68 The maximum optimal efficiency ratio of the
company is 50%. The fixed asset turnover ratio of the company in 2018 is .89 and in 2019 is .94
and the debtor turnover ratio in 2018 is 39 days and in 2019 its 37 days. It indicates that in
compare to 2018 they are able to cover their debt to the debtors in lesser time period which is
quite good for Tesco.
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LO 3
P 5 Benefits of International Accounting Standards (IAS) and International Financial Reporting
Standards (IFRS)
International Accounting Standards (IAS):
These standards were first international accounting standards which were issued through
International Accounting Standards Committee made in 1973. The objective was to create it easy
to contrast businesses around the world, enhance transparency and trust in financial reporting and
adoptive international trade and investment (Flower, 2018).
International Financial Reporting Standards (IFRS):
These standards are setting up common rules, so that financial arguments can be
conformable around the world. IFRS are issued by International Accounting Standards Board in
which they clear ways of maintaining and reporting the accounts by firms. These standards are
setting up to make common accounting communication, so that companies and their financial
statements can be consistent and reliable from firm to firm and nation to nation.
Benefits of IAS Benefits of IFRS
It is beneficial for improving the international
investment in terms of review financial
documents from international firms.
It is good for increasing the larger
comparability in terms of determines the
investment by investors.
These standards serve ethics compliances
which involves standard of behaviour, code of
accounting to the firm (Al-Sartawi, Alrawahi
and Sanad, 2016).
This can provide freedom to follow IFRS to
specific condition that leads to more easily read
and helpful statement.
These standards set generalized standards
which are applicable and helpful to different
territorial circumstances and practice.
It will be decrease time, contribution and
expenditure of making many reports (Acharya
and Ryan, 2016).
IAS also modify accounting for multinational
corporation which have facilitated and
It will aid to contour the system through
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functions in multiple nations. making one focused authorized body.
P 6 Models of financial reporting and auditing
Financial Reporting Model:
According to Government Accounting Standard Board (GASB) evaluates to conclude
leading per-agenda research action which is re-analyse of the existent financial reporting model.
The financial reporting model is the design which sets the structure and content of financial
reports issued through state and localized government. The research of GASB in this field is
section of continuous review of existence standards to assures they constant to meet their goals
in the current financial reporting atmosphere (THE FINANCIAL REPORTING MODEL, 2019).
The reporting model involves basic and notes financial statement and needed supplementary
information. The GASB has also analysed the financial reports of hundreds of different kinds of
government and reviewed the applicable academic and professed literary study.
Model Audit:
It means to the informal term utilized for the activities performed while organizing due
diligence on the financial model with the aim of removing spreadsheet mistakes. Model audits
are requested through banking companies with aim of re-ensuring lenders and investors alike that
calculation and hypothesis controlled in the model are exact which outcome obtained through
model are reliable (Al-Sartawi, Alrawahi and Sanad, Z., 2016). It is needed to review the model
and scope of review is frequently spread to involve tax and accounting, sensitivity experiment
and check of information that controlled inside the model back to legal certification and actual
financing.
LO 4
P 7 Variation and importance of financial reporting
The preparation of financial reporting is varied from organization to organization and
from one country to another country. For example some organization use the straight line method
to calculate the depreciation and some organization use the written down value method to
calculate the depreciation (Umpierres and et.al., 2018). The usage of different method also vary
the result of the organization. International financial reporting standard prep[are some financial
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standard and set of rules for the different organization to follow the rule and provide the
information to the users. They set the common rules for the whole organization. IFRS are based
on certain principles which force all the organization to follow the accounting method in same
way so the international client and investor can get the same information and evaluate the data in
same way. It helps them to make the decision of investment.
Financial reporting varies because of the different standard and methods used by different
countries. Each country have own standard and set of rules to prepare and present the financial
data. For example US use the LIFO method for calculation of inventory. It helps them in
treatment of tax in the organization while t eh other country like India use the different methods
such as LIFO, FIFO and weighted average method to calculate the inventory level and order
quantity in the organization. They use the method according to the requirement (De Simone,
2016).
IFRS help the organization to use the common standard for calculation of the data and
improve the efficiency, productivity and profitability of the company. It also helps the worldwide
investor to use the financial information to make the choice of investment. IFRS provides set if
benefits to the organization. It helps them to pool the worldwide customer and follow the single
standard rather than to follow different accounting standards. But there are some barriers in the
usage of IFRS (Preiato, Brown, and Tarca, 2015). Some countries like US refuses to adopt the
IFRS for the evaluation of the financial report and statements.
CONCLUSION
The report summarizes the importance of financial accounting and the various purpose of
financial accounting in the company. It helps the accountancy firm to evaluate the financial
information and provide the various suggestions to their clients. The various conceptual and
regulatory framework help the organization set the various accounting standard and rules and
regulation to present the data accurately and more reliable. It can be concluded from the report
that the various stakeholder such as customer, suppliers, investor, lender and manager use the
financial information to measure and evaluate the financial position of the organization. The
presentation of financial report such as cash flow, budget, profit and loss account etc. help the
accountancy firm to meet the objective and growth of the company. It can be concluded that the
preparation of financial information are required by the organization to evaluate the performance
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and take the major decision regarding the investment, lending and purchasing the material by the
different stakeholders.
The report also summarized the uses of ratio analysis to meet requirement of liquidity,
profitability and efficiency of the company. The different accounting standard such as
international accounting standard and international financial reporting standard provide the
guidelines to the company to present the data in more systematic manner so the user can easily
evaluate the results. It helps to understood the benefits of IFRS and the importance of financial
reporting in different countries.
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REFERENCES
Books and Journals
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compliance with international accounting standards (IAS-1): Evidence from Bahrain
Bourse. International Research Journal of Finance and Economics, 157, pp.110-122.
Cardwell, L.A., Williams, S. and Pyle, A., 2017. Corporate public relations dynamics: Internal
vs. external stakeholders and the role of the practitioner. Public Relations Review, 43(1).
pp.152-162.
Cascino, S. and Gassen, J., 2015. What drives the comparability effect of mandatory IFRS
adoption?. Review of Accounting Studies, 20(1). pp.242-282.
De Simone, L., 2016. Does a common set of accounting standards affect tax-motivated income
shifting for multinational firms?. Journal of Accounting and Economics, 61(1). pp.145-
165.
Ellwood, S. and Newberry, S., 2016. New development: The conceptual underpinnings of
international public sector accounting. Public Money & Management, 36(3). pp.231-
234.
Flower, J., 2018. Global financial reporting. Macmillan International Higher Education.
Katta, A. K., 2018. International Financial Reporting Standards (IFRS) Adoption on Financial
Decisions.
Li, S., Sougiannis, T. and Wang, S., 2017. Mandatory IFRS Adoption and the Usefulness of
Accounting Information in Predicting Future Earnings and Cash Flows. Available at
SSRN 2948775.
Mazur, A.K. and Pisarski, A., 2015. Major project managers' internal and external stakeholder
relationships: The development and validation of measurement scales. International
Journal of Project Management, 33(8). pp.1680-1691.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31. pp.45-62.
Öztürk, C., 2017. The role and current status of IFRS in the completion of national accounting
rules–Evidence from Turkey. Accounting in Europe, 14(1-2). pp.226-234.
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