Question

You and a friend, who is not an accounting major, are watching the news when they announce that Amazon.com, Inc. has just released their earnings report, including all four primary financial statements. Your friend knows that you are well versed in financial reporting and the usefulness of accounting information and asks you, Why is this news?

Prepare a written response explaining the objectives of financial reporting. Include in your response an explanation of who might care about this news and why. Remember to explain these things in such a way that a non-accounting major would understand.

Answer 1

Solution :

Four major Financial Statements:

Income Statement

Balance sheet

Cash Flow Statement

Statement of Changes in equity

What are Financial Statements ?

Financial Statements is nothing but a collective information about companies financials for the given period presented in the prescribed format as per the law binding the organisation. It shows the financial position of the organisation.

This transactions are firstly recorded in books of accounts maintained by the organisation e.g. Journal is maintained to record the events as and when they happen and this events are subsequently posted to there respective ledger accounts and ultimately this ledger accounts are closed at the year end and the balance is transferred to the financial statements which are prepared as to get the cumulative results of incomes earned and expenses made for the period.

Income Statement shows the net results of the business Operations during the accounting period.

Balance Sheet which is also called as positional statement shows the final position of the business enterprise on that particular date.

Statement of Cash flow shows the flow of cash used in the business in the form of inflow and outlflow in each and every aspect for the accounting period.

Statement of changes in equity shows the changes happened in the equity balance for the accounting period in the form of issue of shares for subscription or redemption of shares etc.

Objectives of financial Statements or financial reporting:

Knowing Profitability of business : Financial statements are prepared to know whether the organisation is making adequate earnings. It also helps to understand whether the company has increased its earnings as compared to the earlier period or has decreased which helps in understanding management the reasons of decrease and corrective measures to improve it.

Knowing the Solvency of the business : This financial statements are useful to analyse the position of business to repay its short term and long term liabilities.

Judging the growth of the business : The comparison of various periods data of the organisation helps in getting the conclusion regarding the growth of the business during the years.

Financial Strength of the business: Financial Strength of the business plays an important role in buying assets decision since the company should be in a position to make big investments without hampering its funds.

Forecasting and preparing budgets : The company needs to forecast budget for the companies upcoming business in order to identify its goals and targets and steps to complete them throughout the period.

Making comparison with the industry standards and make changes in the company policies accordingly : When a company is into a specific business, it has a industry standard provided by the analysing agencies to keep the organisation aware of its operational growth the other earning related factors to compare and understand where the lag behind and understand the focus area.

People affected by the disclosure of financial statements decision.

The people who are interested in the news of company disclosing its financial statements are Companies Shareholders, Analysts in the market, Government, the companies Creditors and investors etc.

Companies Shareholders are the people who has invested in the shares of the company for attractive returns for the investment made by them. The company showing good earnings and growth in its business as compared to earlier period shows the potential ability to give good returns for the investment made in this company and hence people make buying decision based on these.

Analysts in the market need this data to create a comparison in the same business area of the organisation and give results to the investors who are interested in making investment in the company. Thus analysis is done based on the disclosure made by the organisation.

Government needs the data to keep an eye on the companies growth oppurtunites and the compliance made by the company in respect of law binding the company.

Creditors and investors who are investing money in the business and providing goods to the business are interested in knowing the paying capacity of the business in order to make decision whether to continue trading with the business or to stop the deal making.