Subjective exam intermediate accounting Essay Example for Free

Subjective exam intermediate accounting Essay 1. The conceptual framework deals with five main points that will be explained in this question. It first outlines the users of financial statements and their information needs, which are illustrated below: †¢ Investors – the providers of equity capital to the organization are mainly interested in the going concern of the company, together with the return attained from such investment. Indeed their investment decision will basically be, buying, selling or holding their equity investment. They will thus examine the financial performance of the company to analyze its ability to pay dividends (International Accounting Standards 2000, p 44). The financial position and financial stability will also be assessed in order to evaluate the ability of the company to continue operating in the future. †¢ Employees, lenders, suppliers, customers and public – employees who seek job security and lenders/suppliers who also demand secure investments are interested in the ability of the company to continue operating. They will therefore examine the financial position and stability. Customers, especially those who purchase goods that need after sales service are also interested in the going concern of the firm. The public is also interested in the going concern of large companies due to their economic event (International Accounting Standards 2000, p 44-45). †¢ Government and their agencies – the government is mainly concerned with the allocation of the firm’s resources. He will therefore demand information pertaining to the activities of the company. Profitability is another important matter that shows the corporation tax liability of the company (International Accounting Standards 2000, p 45). The objective of the financial statements is then outlined in the reporting framework. This aim basically entails to provide financial information concerning the financial performance, position and stability of the firm to interested users in order to aid them in their economic decisions. Due to the separation that normally exists between the stakeholders of the company and the persons managing the company, the feature of stewardship arose. Indeed the annual financial statements act as a financial report that portrays the stewardship of management in managing the resources entrusted to them (International Accounting Standards 2000, p 46). Due to the importance of the economic decisions taken by users, it is imperative that the financial statements are build on attributes that enable such information to be useful. In this respect, the qualitative characteristics of understandability, relevance, materiality, comparability and reliability were developed. There are also underlying concepts like accrual basis, going concern, prudence, objectivity and substance over form that financial statements ought to abide with. The accruals basis, for instance states that revenue incurred in a particular period should be matched with expenditure earned in that period (International Accounting Standards 2000, p 49, 52-53). The framework also outlines the need that due to the importance of financial statements, it is essential that the financial statements show a true and fair view of the state of affairs of the company. Laws on companies further builds on that necessitating the need of an audit. The elements of the financial statements are also explained in the framework. This section of the framework commences with the factors that build up the Balance Sheet of the company and portray the financial position and financial stability of the company. They recognize and explain the three main elements of the Balance Sheet, which are assets, liabilities and equities. An asset is defined as the resources owned by the company, which provide future economic benefits to the firm. The framework notices that many assets shown in such statement have a physical form, such as land, buildings and inventory. However, the physical form is not an essential element for the recognition of an asset. Indeed there are assets that do not hold a physical form but are also recorded as intangible assets, like purchased goodwill. The right of ownership is also not a critical element for recognition of an asset (International Accounting Standards 2000, p 56-58). This is in line with the substance over form principle noted in the previous section of the framework. For example, a finance lease is recognized as an asset in the Balance Sheet of the lessee even though the title may not be transferred. This is due to the fact that all significant risks and rewards resulting from ownership of the asset are transferred (IAS 17 (1997), p 381). Liabilities comprise present obligations that will result in outflow of economic benefits of the company in the future. A difference is outlined between the present obligations and future commitments that are inbound to exceed one year. The settlement of a present obligation is normally in the form of a payment of cash, transfer of assets, a service provided. However, the framework recognizes the fact there are other forms that encompass an outflow of economic benefits for a present obligation (International Accounting Standards 2000, p 59-60). Equity is explained as the resources entrusted by the shareholders together with the profits generated by the company and other reserves that may arise from transfer, business operations or other activities. This portrays the capital maintenance adjustment that will be further described in the proceeding part. The generation of reserves may arise either to enhance the value of the company as decided by the directors or to comply with relevant legislations (International Accounting Standards 2000, p 60-61).