Introduction To Management Essay
This accounting information is thus found in Profit and Loss Account and Balance Sheet which are normally prepared under the generally accepted accounting standards. In the case of US corporations, their financial statements must be prepared in accordance with the generally accepted accounting standard (GAAP) while in the case of European Union corporations, the international accounting standards (IAS) or the International Financial Reporting Standards (IFRS) should be prepared.
It may be argued the application of the accounting standards considers the application of accounting principles and assumptions and concepts which enhance the value of accounting information. One of these concepts is the issue of recognition of the accounting elements where incorporation of these elements is made part of the balance sheet only if certain criteria are met. One is the requirement that it must be probable that any future economic benefit associated with the item will flow to or from enterprise and the other one is that the item’s cost or value must be measured reasonably (Deloitte Touche Tohmatsu, 2008).
Criteria did not come into the picture by accident but they were conceived under a set of supporting implicit assumptions and accounting concepts. One of these is the going concern concept which presupposes that the continuation of the business entity to continue operating for a period of time sufficient over its normal life to complete its contemplated targets and goals until otherwise stopped by imminent liquidation. In other words there is the presumption of continuing to live indefinitely.
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Thus one could understand the use of the historical cost in recording rather than the liquidation value of the items in affecting the future nature of the organization. Closely related with criteria for recognition of the elements is the use of qualitative characteristics of these statements that are valued by users. To be useful financial accounting process should generate products or output to help the rational man to make economic decision.
Usefulness is associated with understandability of the information so that users could grasp the same with their reasonable knowledge of business and economic activities or if they are willing to study the information industriously Usefulness also connotes relevance of the information or its influence on the economic decisions of users by evaluating the past, present, or future events on many possibilities, the least of which should be favorable to said decision makers’ interests.
Usefulness also implies reliability so that information should be free from material error and bias and user can depend upon them in representing events and transactions faithfully (Deloitte Touche Tohmatsu, 2008). Accountants, who are technically competent to prepare the same, agree that these financial statements are being prepared to attain its aim of providing information about the financial performance and financial position of a firm for the economic-decision making (Bernstein, 1993; Brigham and Houston, 2002).
Generally users get interested in the financial position of an enterprise, which in turn gets affected by the economic resources the company controls, its financial structure, its liquidity and solvency its adaptability to changing conditions in the environment where the company operates (Plunkett and Attner,1985; Porter,1980). To know therefore about historical financial position of a firm, one will have more confidence that the future would not be much different or be closely connected about the result of the past.
If compared with the job of a doctor who studies first the history of the patient before he or she prescribes a medicine or a cure, investors conduct various analyses in coming up with the decision on whether they would invest in the company’s stocks or sell their present stockholding or keep holding such investments until the favorable time comes. It cannot be that the investors would be using the future to forecast the future.
The present therefore is understood by its relationship with past so that the future must also be related with present and the past. By using the past information, the investor is more of a rational human person rather than just a gambler, a speculator or wishful thinker. References: Bernstein (1993) Financial Statement Analysis, IRWIN, Sydney, Australia
Brigham and Houston (2002) Fundamentals of Financial Management, Thomson South-Western, US Deloitte Touche Tohmatsu, (2008) Summaries of International Reporting Standards, {www document} URL http://www. iasplus. com/standard/framewk. htm, Accessed May 14, 2008 Plunkett and Attner (1985) Introduction to Management, PWS-Kent Publishing Company, Boston, Massachusetts. USA Porter (1980) Competitive Strategy, Free Press, New York, US
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