Question

Subject / Financial Statement Analysis

Identify and discuss the reliability of “sources of Financial data/information” ( Asian and International Sources)

Answer 1

Financial statements are the end result of the bookkeeping that is done throughout the year.

At the year end when the bookkeeping is done for the whole year than financial statements are prepared. These financial statements are prepared based on what is recorded in the books and the level to what these financial statements are correct depends upon the authenticity of the entries that are booked throughout the year.

Once the year is completed and the owner and other business parties wants to know, what the financial position of the business is? They ask for the financial statements.

The financial statements consists of the balance sheet and the profit and loss account.

Balance sheet is further categorized into assets and liability side.

P&L is also categorized to the type of expenses that are made by the business in the whole year.

Now the sources of the financial statements can be internal or external.

Internal sources

1. Internal expense reports
2. Internal drawings memos
3. Internal petty cash vouchers
4. Internal maintenance expenses vouchers.

External sources

1. Bank statements
2. Inventory reports
3. Credit card statements
4. Payroll reports
5. Vendor account statements
6. Customer accounts statements
7. Loan agreements
8. Invoices
9. Bills
10. Hire Purchase agreements

Now whatever is in the balance sheet that can be easily supported by the above mentioned list of supporting documents?

1. Suppose the balance that is shown in the bank can be verified by the bank statement

This statement has high degree of reliability as this is an external source and cannot be edited.

This statement is not at all influenced by the insiders of the business for their own benefits.

1. The balance that is in the inventory side can be verified by the inventory report that is received from the warehouse department. This report also has high degree of reliability.
2. Now the liability that is shown on the account of CC can also be verified by the year end CC statements and this also serves as an good source of reliability
3. P&L expenses that are for the employees can be verified by the payroll reports that are received from the payroll departments. Here the reliability is judged if the employees are compensated as per the compensation policies are adhered to and the reports are prepared by the external party and not by the in-house experts.
4. The balance that are shown in the accounts payable ledger can be verified by the statements of accounts that are requested from the vendor.
5. Customer accounts balances can be verified by requesting the account statements as in their books.

So in this way the external sources of financial statements have a high level of accuracy and are much reliable as compared to the internal sources.