Users of Accounts/ Financial Statments

What is meant by users of Accounts?

Individuals or groups who use the company’s financial statements to make econ decisions and to evaluate managements resources.

Who are users of accounts?

1. Shareholders and potential investors -profit, future cash flow, financial strength

2. Lenders/ Banks - Liquidity, debt, cash flow

3. Trade Creditors/ Suppliers - Short - term solvency, cash, trade payables

4. Management and directors - Sales, Cost, profitability/performance

5. Customers - Going-concern strength, ability to supply goods/services

Why does Financial Reporting Matters?

Primary users need info about economic resources and claims, financial performance and cash flows to assess future net cash inflows and stewardship.

This report can’t provide every detail, so user also use external econ and industry info

What are Qualitative characteristics?

features that make financial info useful to users when they make decisions about equity.

Why do we need Financial Reporting Regulation? (Qualitative)

1. Info relevant

2. Info reliable

3. Info is accurate and free of error

4. Readers can understand what is being reported

5. All stakeholders requirements are addressed

6. Reporting methods are consistent over multiple periods

7. Financial statement depict a true and fair view

What are the 2 type of Qualitative characteristics?

1. Fundamentals (needed)

2. Enhancing (Improves)

What are the Fundamentals characteristic?

Relevance - Info can influence a decision. Help predict future outcomes or confirm/revise expectations

Faithful Represent - Info reflects the underlying economic substance honestly, complete, neutral and free from error as far as practicable.

What are the Enhancing characteristic?

Comparability - Users identify similarities/differences between yrs or entities. Consistent policies and clear disclosure help.

Verifiability - Independent, knowledgeable observers could reasonably agree the info is faithfully represented.

Timeliness - Info arrives early enough to influence decisions.

Understandability - Clear classification, labels and notes diligent readers understand info

What is an Accounting Standard?

rule or set of rules which prescribe the method by which accounts should be prepared and presented.

Apply to all accounts intended to give a True and Fair View (Faithful Representation)

Identify users of accounts and explain why they need them

• Financial statements provide financial information that helps interested parties assess a company’s financial performance, position and cash flows. The primary users of general-purpose reports are existing or potential investors, lenders and other creditors. Investors examine profitability, risk and potential returns before buying or selling shares. Banks assess whether the business can repay interest and principal before advancing loans. Suppliers use cash and current-liability information to decide whether to offer trade credit.

• Other users include employees, who consider job security and wage negotiations; governments, which use reporting information for regulatory and economic purposes; and management, which assesses performance and allocates resources, often using more detailed internal reports. In companies, shareholders and managers can be separate, so published statements also help shareholders assess management's stewardship of their investment

Explain qualitative characteristics of useful financial information

• The Conceptual Framework states that useful financial information must possess the fundamental characteristics of relevance and faithful representation. Information is relevant if it can make a difference to users' decisions through predictive or confirmatory value; materiality is an entity-specific part of relevance. Faithful representation means showing the economic substance of transactions in a way that is complete, neutral and as free from error as practicable.

• The four enhancing characteristics are comparability, verifiability, timeliness and understandability. Comparability helps users evaluate businesses or periods against each other; verifiability means knowledgeable independent reviewers can check the information; timeliness means it is available when decisions are made; and understandability requires clear and concise presentation. For example, IAS 20 grant notes enable investors to understand whether grant income is recurring and how grants affect current-year profit, improving both relevance and understandability.