Financial reporting is a statement to show the quantitative information on organization's financial performance and resources. Beside that, they are three basic financial statements common used in all type of business activity which are balance sheet, income statement and cash flow statement. The Balance sheet showed the financial position of an organization for at a particular period of time and income statement showed the entire revenue and expenses incurred in the organization for a period of time and measure the organization is in profit, loss or breakeven status. Lastly, cash flow showed that where the cash come from and where the case being used during the accounting period. (Porter and Norton, 2010, pg 54) Every statement has different objective or purposes which are important to all users. However, the main essential objective of the financial reporting is to provide financial information to users and help them make informed decision.
The user of the financial reporting classified into two categories which are internal and external users. The major internal user is the management of an organization. Manager used the information to make a routine decision in planning and controlling of the entire organization's activity. For example, the manager can used the financial information to determine whether the business should be continue, expand or closed it. Lastly, the financial reporting also will help the manager have efficiency to control the cost of all activity to increase the organization's profit. (L.C. Posthumus, N. Basson,P. Olivier, p 2)
Furthermore, the major external user is the investor. Investor is a shareholder of an organization who interest to determine the amount of dividend which they can earn from their investment. Therefore, they needed the financial information to compare different companies to decide which companies have made higher return and determine the stability and profitability for the company. (Daniel M. Kimuda, p4) Moreover, there have another external user of financial reporting which are Government and other authorities. Government used the financial information to calculate the income tax and make economic decision. Other authorities such as National Bank used the financial information for national statistics such as national income and national inflation rate. (L.C. Posthumus, N. Basson,P. Olivier, p 3)
Last but not least, financial reporting also very important to supplier and banker that is because the two parties can uses the financial reporting to determine the reasonable credit limited or loan should be owed by the company and it also can ensure that it is the company able to pay amounts owing or interest on proper time. (Daniel M. Kimuda, p4)
SECTIONA-QUESTION2
Accounting information can be regarded as useful not only base on the objective for which the information is required, but also base on the characteristic of useful information.
Understandability basically defined as the information provided in financial statement must be readily understandable by expected user. Understandability does not necessarily mean simplicity. It means that the information must be comprehensible to users who are assumed to have a reasonable knowledge of business and economic activities and willing to spend the time to understand it. Therefore, information about complex matters that should be included in the financial statement although it may be too difficult for some users to understand but it cannot exclude because some of the users will make decision base on the complex matter. (Porter and Norton, 2010, pg 57)
Understandability alone is not enough to make the information useful. There is another characteristic to make information became useful which are Relevance. Relevance is the capacity of information to make a different decision. It means that, relevant information can help the user to form, confirm or correct a decision. Lastly, irrelevance information will waste time and increase the risk of loss therefore it is very essential that the financial information should be stick to the need of user and not provide extra information than is necessary. (P C Tulsian, 2008, p.10)
Reliability it means that the user must have a high degree of confidence that the information presented in a set of financial statement is accurate, credible and there are no material error. (David Alexander and Anne Britton, 2005, p.14)To be reliability, the information must be independently verified. Beside that, the information must represent faithfully the transactions that corresponding to an actual event. Lastly, the information must be neutral, it means that the information must present in actual and it is not slanted. (Porter and Norton, 2010, pg 58)
Useful information must be Completeness. It means that the user of accounting information should be given a full or complete picture of the reporting business as detail as possible. All material transactions in the business must be recorded to fulfill the user's information need and requirement. As a result, a complete financial statement it implied large and complex collections of information. (David Alexander and Anne Britton, 2005, p.14)
Timeliness it means that financial statement should be provided to the user in time for use. If there is delay in reporting the information, it may lose its relevance. Therefore, information in financial statement should be up to date. A timely financial statement was more useful to users to help them make decision and action compare to precise and accurate information presented after the decision has already been made. (David Alexander and Anne Britton, 2005, p.14)
The information showed in financial statement should be Objective and it is not biased toward a particular user group. Consequently, useful accounting information prepared or reported should meet all proper user needs and it should be neutral and not include any unbiased personal opinion of the preparer of those statements. (David Alexander and Anne Britton, 2005, p.14)
Comparability means that information is reported in such a way that a decision maker can identify the different and similarity among different companies. Beside that, it enable user to recognized changes in the economic phenomena over several periods between two or more companies. However, there are problems to compare different companies because different companies will adopt different accounting policies. A clearly consistency of treatment is very essential to the comparability quality of the financial statement. Consistency means that financial statement can be compared within one single company from one accounting period to the next. Accounting information is consistent when the company uses the same accounting method and principle from year to year. (Needles Powers Crosson, 2008, p.235)
SECTIONA-QUESTION3
Income statement also knows as profit and loss statement. The Income statement is a statement to show the financial performance of the business in a specific time period. In terms of reports, the period is normally one year or one calendar quarter. The most important purpose of income statement is to measure the profit or loss for the period. In the profit of calculation Income + Expenses = Profit we can clearly see about how much profit is made. In the income statement the profit are calculated in two sections which are gross profit and net profit. If the revenue incurred is over the expenses of the company is called net profit. Conversely, if the expense incurred is exceeds the revenue of the company is called net loss. (Aidan Berry and Robin Jarvis, 2007, p. 69)
The first component of the income statement is income. There are two categories of the income which are revenue and other income. Revenue is the income gain or received from the main trading of the business. The revenue was recognized when the goods are sold to customer. Other income is an income other than those derived from trading of the business. For example, rent, interest, commission received and so on. (Rick J. Makoujy. Jr., 2010, p. 4)
Furthermore, another component of the income statement is expenses. Expense is a cost that decreases the financial benefits in the form of an outflow of asset or increase in liabilities. For example, cost of sale, distribution expenses, administrative expenses, operating expenses and taxation. (Aidan Berry and Robin Jarvis, 2007, p. 73)
Balance Sheet is a statement to shows the information about the financial position of company at a certain period of time. The balance sheet it is a picture of what your company own and owes at a certain period of time and it also showed a company's financial position is strong or weak. The balance sheet is an expression of the basic accounting equation which is Liability + Equity =Assets. Consequently, the balance sheet was made up in three basic components which are asset, liability and equity. (Linda Pinson, 2007, p.63)
Asset basically defined as everything owned by or owed to the companies that can bring future financial benefits to the company. They are two types of assets which are current asset and non current asset. (Rick J. Makoujy. Jr., 2010, p. 1) Current assets are assets that are expected to be converted into cash within one year or less of the normal operations of the business. Examples for the current assets are cash, inventory, prepaid expenses, accounts receivable, and so on. (Linda Pinson, 2007, p.64)
Non- current asset also know as fixed asset. Fixed asset is an asset which owns by a company and does not intend to resale. Therefore, these owed assets are classified as long term nature. Non-current asset can be further classified into tangible and intangible asset. For example, tangible asset include land, building, plant, office equipment and so on. Beside, intangible asset are normally defined as trademark or patent on a product or process that has been created by the company itself. (Linda Pinson, 2007, p.64)
Liabilities basically defined as what the company owes and claims by the creditor on your assets. The most common classes of liabilities are current liabilities and long-term liabilities. Current liabilities are liabilities will be due within one year or one accounting period, such as accounts payable, short-term loan, bank overdraft and accrued expenses. Long-term liabilities are liabilities that expected to be due after one year from the date of the balance sheet such as debentures, mortgage payable and long term bank loan. (S.Kugbei, M.Turner and P.Witthaut, 2000, p. 43)
Lastly, equity normally defined as the different between assets and liabilities. Equity also called as capital or net worth. In other word, equity consists of claims against the assets of the company by its owners. Beside that, equity generally has three components which are share capital contributed by the owners of the company, retained earning and reserves. (S.Kugbei, M.Turner and P.Witthaut, 2000, p. 43)
