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Assignment Financial Accounting and Reporting - Essay Example

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Assignment Financial Accounting and Reporting

The creditors assess the ability of a company to repay their loan. Hence, ratios pertaining to leverage and cash flows are essential for the company’s creditors and bondholders. Existing and potential Shareholders: Existing shareholders need the financial accounts to assess the long term viability of their investment whereas potential shareholders also require financial information to decide the future prospects of the company (Porter & Norton, 2012). This aids in deciding whether the investor should invest in the company or not. Shareholders generally look at the company’s ratios such as return on equity, dividend yield and price to earnings ratio to assess whether to invest or to not invest in company. Governmental Agencies: Tax collection agencies are interested in a company’s financial accounts to ascertain the tax that a corporation must pay to the government. Securities and Exchange Commission (SEC) prescribes the manner in which financial statements are presented and hence effectively is a user of company’s financial accounts (Sofat & Hiro, 2006). Stock brokers and financial analysts: Financial analysts use a company’s financial counts to prepare financial reports advising their clients to invest in a particular stock. Supplier: Suppliers of a company also use financial accounts to assess whether the company would be able to honour its payments. Suppliers look at a company’s accounts payable and if the accounts payable are very high, it indicates that the company’s creditworthiness is low. Suppliers are also concerned with liquidity ratios such as current ratio and acid test ratio to ascertain a company’s ability to meet short term commitments. 2. Financial Accounts are prepared by a company itself and the information presented in the financial accounts is only available with the internal sources of a company. Hence a company can twist the factual information to present a glossy picture of the company in order to entice investors to invest in the company. This is why the role of auditors and regulators is very important in the presentation of financial accounts. Regulations safeguard the interests of external user of financial accounts so that the information presented by the company is free of any bias and errors. The regulations require that the companies present the financial information accurately on an annual basis and the statements should be duly audited by an external auditor. Moreover, the financial accounts should give a true and fair picture of the company and the company should not attempt to misrepresent any information. Moreover, the requirements differ if a company is a sole proprietorship, partnership or a public limited company. A company also needs to adopt accounting standards based on the location it operates in. International Accounting Standards Board (IASB) is an independent standard setting body of IFRS (International Financial Reporting Standards) foundation (IFRS, 2013). A company has to claim compliance with IFRS and present its account on the basis to IFRS. This helps in comparing the financial statements of various companies across an industry and helps in deciding whether the company’s performance has improved or worsened compared t the overall industry’s performance. On the other hand, FASB (Financial Accounting Standards Board) also establish accounting standards in the United States and the companies operating in the US have to ...Show more

Summary

1. Users of accounting information are categorized based on their relationship with the company. Financial accounts are prepared for the external users of a company. External users are not directly linked to the operations of a company and hence have reduced ability to obtain information…
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Assignment Financial Accounting and Reporting essay example
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