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Financial Reporting - Essay Example

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Financial Reporting

Each major purpose of accounting often requires a different way of presenting or reporting the information in the accounting system. In this scenario, it may be emphasized that it is a vicious circle in that there are managers in organizations who affect accounting and such accounting in turn affects people's behaviour. The impact of accounting reports on the decision making behaviour of business, government and creditors is termed as the 'economic consequences' and the world has seen the worst of such consequences because of the bad reporting as in the case of 'Enron Corporation'. It may also be observed that such external reporting had given rise to the preparation and presentation of consolidated financial and non-financial statements. Several arguments have been flowing around about the very purpose behind the merits and demerits of such consolidated statements. In this context, this paper attempts to draw an overall picture of the position of the consolidated statements in relation to decision making by the stakeholders vis--vis the presence of the consolidated statements as a deterrent factor to have a clear understanding of the decision making process.
"Management wealth, it is argued, is a function of changes in share prices (via stocks and stock options), and changes in cash bonuses (via compensation plans). Ordinarily, managers are predicted to have greater incentives to lobby for accounting standards that lead to increases in reported earnings and thereby management wealth." (Markus J. Milne)
It is more than normal that managers indulge in enhancing the reported earnings to strengthen their positions in the organizations higher echelons.
Positive Accounting Theory studies the manager's accounting policy choices as part of the overall process of corporate governance. Under this theory Positive rather than Normative accounting policies are chosen strategically.



3.0 REASONS FOR FIRMS TO ADOPT CONSOLIDATED FINANCIAL REPORTING:
This part of the paper analyses the various reasons why a firm may decide to resort to consolidated financial reporting. The decision may be partly due to the statuary obligations placed on the firm and partly on the managers' decision to go with the publication of consolidated statements.
Statutory Regulations as a reason for publication of consolidated financial statements:
Earlier studies (Whittred 1986, 1987, 1988) concluded that the regulations did not have much impact for the firms to resort to consolidated financial statements, whereas the contracting cost variables were the major determinant for publication of consolidated statements. However later it turned out that Regulations did play a major role in compelling the firms to adopt publication of consolidated financial statements. "The introduction of tax legislation permitting the presentation of consolidated returns seems to have been a significant factor in widening the profession's awareness of ...Show more

Summary

Accounting is major means of helping mangers to administer each of the activity or functional areas for which they are responsible and to coordinate those activities or functions within the framework of the organization as a whole. (Horngren, Foster and Datar 2000)
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Financial Reporting essay example
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