First of all, what is the primary objective of financial statement? Financial statement is to provide information about financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions – stated by International Accounting Standards Board (IASB). For providing information of financial statement, there are two accounting methods for companies to report their financial statement. Cash accounting and accrual accounting both are the main method to prepare the financial statement. Cash basis accounting is a very basic form of accounting. Revenue is recorded only when the cash is received, and an expense is recorded only when cash is paid. Preparing an income statement under the cash basis of accounting is prohibited under generally accepted accounting principles. For example, when a payment is received for the sales of product or services and the revenue is also recorded the Continue reading
Accounting Concepts
Qualitative Characteristics of Financial Information
Qualitative characteristics are the attributes that make financial information useful to users. The qualitative characteristics of financial information can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information. Fundamental Qualitative Characteristics of Financial Information 1. Relevance Relevant financial reporting information means the ability of users (shareholder) to make a difference in their decision. Information regarding to economic phenomenon will help the users make a difference decision if it included predictive value and confirmatory value. Predictive Value: Information has predictive value if the value can be useful to the shareholder in predicting certain things that is related to future. Information which is highly predictable does not necessary has predictive value. For instance, depreciation of plant and equipment by using straight line method can be highly predictable every year, but it cannot assist in evaluating the Continue reading
Current Cost Accounting – Definition and Criticisms
Current Cost Accounting (CCA) attempts to provide more realistic book values by valuing assets at current market buying prices. It takes into account time-value of money and inflation. It is more complex than the traditional accounting, and it has created controversy about what adjustments are appropriate. Unlike Historical Cost Accounting, there is no need for inventory cost flow assumptions such as last-in-first-out and weighted average. The business profit in CCA shows how the entity has gained in financial terms the increase in cost of its resources, which is ignored by historical cost accounting. Differentiating operating profit from holding gains and losses has claimed to enhance the usefulness of information being provided by CCA. Holding gains are different from trading income as they are due to market-wide movements which are beyond the control of the management. Therefore, Current Cost Accounting doesn’t rewards managers for profits from holding gains and losses which Continue reading
Budgetary Slack – Definition, Causes and Prevention Methods
Meaning and Definition of Budgetary Slack In an organization when a manager is responsible for planning incomes and expenses for the a future period, they can plan income very low and expenses very high so that this amounts gets approved by senior management. The manager basically does this thing to be sure of meeting the budget with a very low income goal, the manager should be able to achieve it and go over it. With a very high expense budget the manager should be able to easily keep actual expenses within the Budget. If this happens the managers performance in the coming year will look very good, as it doesn’t really give management any idea of what the coming year will actually look like because it’s not realistic. And it doesn’t show the actual evaluation of the manager’s performance. So this is known as the Budgetary Slack. In other words, Continue reading
What is a Master Budget?
Budget provides comprehensive financial overview of planned company operation. A company’s objectives budget is the overall financial plan showing expenditure of the available funds. A company’s budget is driven by the aims and objectives of the company as well as what it can actually accomplish. Many variables in a business can be budgeted which includes sales, output, cost- (variable and fixed), profits, cash flow, capital investment. Budget should be SMART, that is specific, measurable, achievable, realistic, and with time bound otherwise budget will be ineffective. Strategic objective of the company is the first factor that needs to be considered when formulating budgets because unaligned budget with strategic objective lead to failure. The next step of budgeting is identifying the limiting factor that the organization is faced with which is known as constraint which may be a limit on the number of goods a business could sell (demand is limiting factor) Continue reading
Important Characteristics of Financial Information
The financial statement should contain information sufficient in quantity and quality to satisfy the reasonable expectations of the readers to whom it is addressed. According to the above statement, it is means that the financial statement should contain useful and meaningful information which included quantity and quality so that the reader who we make the financial statement to the person knows and understand it. How we achieve the quality information? The four important characteristics of financial information are understandability, relevance, reliability, and comparability. First, understandability is including taking into consideration users’ abilities, and aggregation and classification of information. Relevance is including having predictive value and confirmatory value. Next, Reliability is including faithful representation, being natural, free form material error, complete, and prudent. Comparability is including consistency and disclosure. All the characteristics are attributes that make the information provided in financial statements are useful to users. Understandability includes users’ abilities and Continue reading