Question

what role do the standards financial report play in communication with a business clients? include three examples in your answer?

( base on Australian tax law and answer in your own word please)

Answer 1

Before proceeding with the answer to your question, it is my duty to ensure that you are assured that I have correctly interpreted your question.

The question, essentially needs to be answered on two levels,

1. The role of standardised accounting in preparation of financial reports.

2. The usefulness of the financial reports prepared in accordance with the accounting standards to various stakeholders i.e. Clients (Eg.Customers, Suppliers, Lenders, etc.)

Role of Accounting Standards

Imagine a city Bancera where everyone speak the same language, say Engfish. People of Bancera use Engfish to communicate amongst one another. However, the language Engfish has no grammar, so, every person in Bancera speaks different versions of Engfish with different meaning for the same words. This leads to confusion among the people of Bancera in understanding other people's words even though they all speak Engfish.

Similarly, in accountancy, financial reports i.e. Balance Sheet, Income Statement and Statement of Cash Flows are prepared by all business entities as mandated by the Law in Australia.

However, if ever business prepared balance sheet with their own grammar (e.g. Treating borrowing as asset, Treating cash as liability, etc.), There would be confusion among people.

Hence, to bring uniformity and provide useful information about the position, performance and cash flows of an entity to the users for making decisions, Accounting standards are necessary.

Usefulness of Accounting Reports to Clients

Example 1: Customers

Customers have an interest in information about the continuity (business health and it's life) of an entity, especially when they have a long term involvement with the products of the entity or are dependent on the entity for their needs.

i.e. A person depositing money with the bank is the customer of the bank. As a customer, the person will be concerned about the long term financial health of the bank. Financial reports, especially Capital Adequacy ratios and norms give useful information about the bank.

Example 2: Suppliers

Suppliers and other creditors are interested in information that enables them to determine whether the amounts owed to them will be paid.

I.e. A woodcutter would be concerned about the business health of the Furniture companies. Only if the furniture company is doing good, the woodcutter can earn money by selling goods to the Furniture Company.

Example 3: Lenders

Lenders are in information that enables them to determine whether their loans, and interest attaching to them, will be paid when they are due.

I.e. When A borrows 10000 dollars from B and promises to pay back in an year, B will be worried if A will be able to pay back after the said period of one year. To test the ability of A to pay back the amount, the financial reports will be useful.