Balance sheets were designed to show what a business would be worth. if it was liquidated...

Balance sheets were designed to show what a business would be worth. if it was liquidated today. What managements need, and extended external reporting (social, environmental and financial reporting.

Expert Solution

Answer:

The initial role of a balance sheet was to help businesses in liquidation as it provides the financial position of a firm at a given time. It provides a summary of the financial balances of a business, that is, summary of the assets, liabilities and equity. These balances help the owners in distribution of assets and payment of liabilities when the business is liquidated. However, in the recent past, changes in the financial framework and business environment prompted a change in the perspective of balance sheet. It is viewed as a resourceful tool for financial and planning decisions. Investors use the balance sheet to make investment decisions about a business and the management using information from the balance sheet to make long term plans of a firm.

Explanation:-

In the contemporary world, businesses and seek investors seek more from financial statements than just provision of the financial position of a firm. The stakeholders desire more from it and it is the reason that there is a paradigm shift in the role of balance sheet. As opposed to providing financial information to help in liquidation, the current business environment demands more from the balance sheet. It is a tool for financial planning to ensure sustainability and increasing the wealth building capacity of a business. Therefore, the balance sheet and other financial statements should provide material information for investors to make financial decisions. Potential investors rely on the financial reports presented by a firm to make investment decisions. As such, the statements should be reliable, accurate and provide material facts about a business. The financial statements should provide useful information such as the financial strategies of a business and the sustainability plans of a firm to help investors figure out the capacity of the firm to build wealth into the future. Financial statements should not focus only on presenting the profitability and the financial position of a business but should provide relevant information such as the future plans of a business and the plans put in place to mitigate extreme economic changes such as depression. In the current business world, economic shocks may not be avoidable but with the right strategies, a business can mitigate the effects. Therefore, investors and other stakeholders desire the financial statements to reflect the reality and provide measures for sustainability of a business.

Additionally, financial reporting should extend to social and environmental concerns of the society and other stakeholders. Financial reporting should be mindful of the social and environmental effects of a firm on the society. This includes disclosing all the material facts regarding the impact of a firm's activity on the environment such as pollution and measures put in place to combat the menace. Businesses operate in a community and it is their role to inform the community of the impact of their activities and ways of reducing negative externalities. Extended financial reporting calls for corporate social responsibility and accountability of all the actions of a company. This is in contrast to the traditional financial reporting where businesses focused only on their needs. In the contemporary world, financial reporting should be accountable and transparent. Extended financial reporting enhances sustainability band improves the corporate image of a firm.

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ekkarill92 answered 1 year ago

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