Relevance of Corporate Financial Statements: Accounting for Business

This report delves into the significance of corporate financial statements, specifically examining their relevance in meeting the needs of external users and highlighting their inherent limitations. Using Tesco as a case study, the report explores how financial information is utilized by various external stakeholders, including creditors, suppliers, government agencies, banks, investors, and the media. It analyzes how these users rely on financial data to assess a company's financial position, creditworthiness, and profitability, thereby influencing their decisions. The report also identifies and discusses the limitations of financial information, such as incomplete data, rigid accounting practices, the influence of personal judgment, the exclusion of qualitative aspects, and adherence to accounting standards. These limitations can impact the accuracy of the information and the decision-making processes of external users. The conclusion emphasizes the crucial role of financial statements in decision-making while acknowledging the challenges posed by the limitations of the information they provide.

Relevance of Corporate
financial statements

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Relevance of financial information in order to meet needs of external users..............................3
Limitations of financial information............................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Financial statements are documents which formulated for the purpose of showing the true
and fair view of organization. In order to understand the relevance of these statement, Tesco has
been taken, this organization is situated in UK, and listed in London Stock Exchange as well take
position as one of the largest supermarket retailer company. This report has been defining the
importance of financial information for different types of external users of organization as well
as showcase limitation of financial statement in systematic manner.
TASK 1
Relevance of financial information in order to meet needs of external users.
Financial information is defining as data which help in showcase the real information
regarding financial position of business organization. Manager by formulating financial
statements able to represent financial information for their internal as well as external
users. Tesco is one of the biggest multinational corporation which successfully lead its
business in market, their management department formulate financial statement which
beneficial for following users
External users: Theses are considering as those parties or organizations or individual
which are not directly connect with business corporation and belong from outside of
business entity. Following are the external users of Tesco:
Creditors: They are considering as person which provides short term loans or credit to
organization, they use financial information for find out level of leverage and capacity of
organization to pay debt, on the basis of that they give credit to Tesco (Adwan, Alhaj-
Ismail and Girardone, 2020).
Suppliers: They provides material to organization. Tesco’s business spread all overall
the world, thus on the basis of finding out the creditability and cash availably, by
reviewing financial statements suppliers provides them material as well as give them
discount for purchasing of materials.
Government: Various government agencies use the data provides in financial statements
in order to calculate tax liability of organization. They also review financial statement of
business organizations in order to determine the economic performance of business
organization.

Banker or other institutions: They are considering as organizations which provides
financial assistance to companies. Many of financial institutions or banks before giving
long term loan or large amount of securities evaluate past performance and financial
statement through which they can recognize the creditability of organization. On the basis
of evaluating financial reports banks decide interest rate as well as give relaxation to
organization. Many of corporates well as foreign bank and institutions provides financial
assistance to Tesco on the basis of reviewing financial information prescribe in financial
statement.
Investor: They are considering as essential external business users of organization.
Investor use financial information of company for finding out the performance level as
well as level of profitability, on the basis of reviewing performance of organizations
investor take decision in which company they invest their capital which further give them
long term benefits. Thus financial statement play vital role as on the basis of reviewing
profitability level agencies or financial institutions gives rating and position in market,
which help in determine and beneficial for investor to take decision (Avwokeni, 2018).
Media: They are not directly connected with organization however media useful for
making goodwill and reputation of organization. Media channels on the basis of reviewing
and evaluating financial statement, divined rate and tax policy of organization, publish
positive or negative information regarding the company. Which directly impact on the
perception of other external users. Tesco able to formulate positive goodwill within market
thus media or newspapers publish positive news about the company which will help in
maintain suitability of organization. Thus financial information also useful for media in
order to present true and fair view and financial performance of company in front of
public.
Limitations of financial information.
Incomplete information: It is not essential that information collected by corporate financial
statement are compete due to error arise during the time of recording of business transactions. It
may be possibility that management department of Tesco not able to record every transaction due
to large number of transactions.
Rigid accounting information; Once the financial statement formulate they are not
changed as the information provides in these statement is not accurate thus it is considering as

rigid information, and due to this government not able to evaluate the accurate position of
organization.
Influence by personal judgement: Accuracy of financial information totally depend on the
person who record and represent financial statement, it may be possibility that due to earning of
secret profit personal not shown or hide the real profit. Which may lead negative impact on the
decision making process to external users (Kaspereit and Lopatta, 2016).
Ignorance of qualitative information: Financial statement are only present quantitative
information. While formulation of financials statement manager totally ignore qualitative aspect,
which may lead or impact on reviewing performance, thus information collected by these
statement and reviewing performance on the basis of taking consider data of financial statement,
these are not reliable or universally accept duet negligence of qualitative aspect.
Based on accounting concept: Financial statement are formulating on the basis of
following regulations and norms of accounting standard thus there will be many rules which
needs to follow while formulating of these statement. The chances of errors during formulation
of statement has been increases (Shan, 2015).
Management department of Tesco represent their financial statement for specific period of
time or at the end of financial year, these statement help in reviewing financial information for
external users however external users face problem regarding taking decision due to facing
limitations of these statements.
CONCLUSION
From the above analysis it has been concluded that corporate financial statement plays
vital role in decision making procedure. As on the basis of formulation of income statement,
balance sheet and statement of cash flow, external users of organization able to reviewing
qualitative performance and position of organization within the market. This information
useful in take decision however external users also face problems due to negligence of
qualitative aspects.

REFERENCES
Books and Journals
Adwan, S., Alhaj-Ismail, A. and Girardone, C., 2020. Fair value accounting and value relevance
of equity book value and net income for European financial firms during the crisis.
Journal of International Accounting, Auditing and Taxation. 39. p.100320.
Avwokeni, A. J., 2018. On the value relevance argument: Do market participants place a
premium on future prospects of the firm?. Journal of Financial Reporting and
Accounting. 16(4). pp.660-676.
Kaspereit, T. and Lopatta, K., 2016. The value relevance of SAM's corporate sustainability
ranking and GRI sustainability reporting in the E uropean stock markets. Business
Ethics: A European Review. 25(1). pp.1-24.
Shan, Y. G., 2015. Value relevance, earnings management and corporate governance in China.
Emerging Markets Review. 23. pp.186-207.
Sheldon, M. D., 2019. A primer for information technology general control considerations on a
private and permissioned blockchain audit. Current Issues in Auditing. 13(1). pp.A15-
A29.

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