Significance of Accurate Financial Statement for Inside and Outside Stakeholders - Term Paper Example

? Financial ments Financial ments represent the financial status of the firm. It is an important tool to assess the financial health of the organization for making projections based on such data. There are several individuals and organizations in the market that are directly or indirectly depended on the financial stability of the firm. The internal users of the company are the top level managers and the employees of the organization. They use the financial statement for formulating plans and making projections for the future financial aspects of the company. The outsiders include the government, investors and the banks. Financial accuracy and transparency is necessary for them as they would base their decision depending on the reports of the financial statement. The accurate representation of the financial statement would motivate an investor to invest, banks to lend money and the government to calculate the right amount of tax for the company. It also benefits the company by spreading their good name and increasing their goodwill in the market. Table of Contents Significance of Accurate Financial Statement for Outside Business Interest 5 Conclusion 7 References 9 Bibliography 10 Introduction The major motive behind creating a financial statement is to analyze the financial position of the company at the end of the year. It is very important to ensure that the financial statements are accurate, as the financial health of the company can be determined through the financial books of the company. It is a critical aspect for the business to create accurate statements because it is not only important for internal requirements of the company but also for the purpose of external reporting and expectation of the investors (Elmaleh, 2005, p. 105-106). The financial statements are the accounting reports which are used to communicate the financial information of the company to the external parties such as banks or the investors. If we consider it from the technical side, we can say that the financial statements help to summarize the processes in accounting and it provides a detailed tabulation of the accounting titles, and the amount of money. It not only indicated the financial position of the company, but also indicates the changes in the financial position from time to time in the organization (McCrary, 2009, p. 83-84). In the recent times, the two major areas that have been identified as the sources of inaccuracy are dishonesty and incompetency. So it can be said that if the organization wants to present a true and accurate picture of the firm, both to the internal and external stakeholders of the company, then it must take measures to remove both of the aforementioned inaccuracies from the financial statements. Financial statement which lacks accurate data because of data collected from unreliable sources would be considered incompetent. Financial accuracy begins right from the time of recording the financial statements. Compromise should not be done at the time of recording the information, as it really becomes difficult for the auditor to analyze and detect the actual figures. This may also lead to miscalculations and misinterpretation of data. It is the duty of the audit firm to conduct an audit of the financial statement and ensure the accuracy of the books. During the auditing process the accounting books and the financial statements are thoroughly checked, the inconsistent recording of financial transaction and record of the entity is also ascertained according to the principles of Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), in the accuracy test. It is very important for companies to present an error free financial report to attract investors. Internal control system should be adequate to present a transparent image of the firm in the market. The internal control system would include the policies that organizations would adopt to prevent fraud, safeguard the assets of the firm and insert accuracy in the financial analysis. An accurate financial statement helps the managers to discover the problem areas and find remedies for the same. They also make projections of the future goals by utilizing the past and present financial statements. So, financial statement is a major performance assessment tool for managers in the organization. Significance of Accurate Financial Statement for Outside Business Interest Financial statements of the organization are essential for the internal users of the organization as well as the external users or the outsiders. The internal group of users signifies the managers, the owners and the employees of the organization, while the external or outsiders are the banks, financial institutions, investors, the regulatory authorities of the country, the suppliers and also the competitors. The accuracy of the financial statement is more important for the external users than the internal users because they are neither not involved in the day to day interaction with the organization nor do they take part in the internal business functions (Ingram, & Albright, 2006, p. 210-212). The financial statement used by the outsiders includes the cash flow, income statement, balance sheet, and the tax reports of the organization. The financial statements are very important for the investors. The accurate information helps the investor to take the right investment decisions. The financial statements which are prepared through the creative accounting technique and the amounts are inflated to present false projections, usually present a negative image of the firm before the investors. Accuracy of the statements is also important for bankers. Bankers study the financial statements of the company to make decisions regarding lending money to the organization. The banks utilize the statement to calculate the current ratios, net-worth ratios, debt to tangible net worth ratio and other loan ratios for analyzing the financial capability of the company. The competitors such as the new entrant in the market may analyze the financial statement of the major companies to take important decisions regarding credit management, cash position or debtors of the company. In accurate financial information can lead to failure of business. The accuracy of the financial statement is also necessary for the regulatory authority and the government. It is legally compulsory for the companies to submit the financial statement annually. The tax authorities require precise financial statement to calculate the taxes of the organization and ensure that the organization is regularly paying tax according to its financial performance. The government maintains the tax department to analyze the tax figures of the company and check the loopholes for illegal tax avoidance or tax evasion. The other outsiders to business are the suppliers. They are the ones who supply raw materials to the organization, so they are the creditors to the company. It is important for the suppliers to know the exact sales figures and the financial position of the company. The financial statement would determine the ability of the company to pay back to the suppliers, so the transparency and accuracy of financial statement is important for the suppliers. The rating agencies also monitor the financial statement of the company to assign the credit ratings. This determines the ability of the firm to handle the ongoing negotiations to increase the pay of the labor unions Conclusion Financial statements are used to get a glimpse of the financial health of the organization. However, it must be noted that financial statements are useful at the time of its generation. It is essential for any business entity to submit accurate financial statement at the end of every year, not only for the internal users but also for satisfying the external users and their expectations. The internal users of the organization such as the managers of the company need correct financial reports for projecting the future cash inflow or outflow of the company. They also take decision or formulate plans based on these reports. So it is very important to maintain accuracy. The outsiders are the investors, suppliers, banks and financial institutions and also competitors, who also view the financial reports. The investors need to see the financial health of the company in order to take decisions regarding investments, similarly the banks and financial institutions study the loan ratios before approving the loans to the company. The government body such as tax collecting offices needs the financial statement to check the regularity of tax payment of the organization. The other external users include the suppliers and the rating agencies, which also depend on the financial statements of the company. It can be said the accuracy is the most important aspect while making a financial statement as the performance of so many other individuals and organization is depended upon the accuracy of the financial reports. References Elmaleh, M. S. (2005). Financial Accounting: A Mercifully Brief Introduction. Maryland: Epiphany Communications. Ingram, R. W., & Albright, T. L. (2006). Financial Accounting: Information for Decisions. Connecticut: Cengage Learning. McCrary, S. A. (2009). Mastering Financial Accounting Essentials: The Critical Nuts and Bolts. New Jersey: John Wiley & Sons. Bibliography Horngren, C., Harrison, W., & Oliver, M. (2012). Accounting. (9th ed.). Boston: Prentice Hall. Read More