IASB’s Conceptual Framework Assignment Sample

• Subject Name : Accounting and Finance

Usefulness of Financial Information and Fraud Prevention

Introduction to Usefulness of Financial Information and Fraud Prevention

Corporate financial reports are the ones that are prepared by all the companies that are listed. It is required by law that the companies produce corporate financial reports. These are the reports that are the primary source of information for stakeholders who like to know about the performance of the firm. There are various types of financial reports that provide various financial aspects of the firm. The main financial statements are the balance sheet, income statement, and cash flow statement. Also at times, some statements show shareholder's equity and also the statement for retained earnings. The information that is provided in the statements is interlinked with each other (Chukwu & Nwabochi, 2019). However, each stakeholder focuses more on certain accounts to derive the information of their use. Investors and creditors also require information about the finances of the company which is provided to them through corporate financial reporting. It serves various need of the users and help them in understanding the condition of the company. Through corporate financial reporting, various decisions can be made by the investors and creditors for the company. The following are the usefulness of corporate financial reports for the investors and creditors for understanding the company.

Usefulness of Financial Statements to Investors

Investors are the ones who invest their money in the business for profits or for growing their money. To get their investment better returns investors need to see the performance of the company and see its growth. It helps them in analyzing the efficiency and effectiveness of the business and management. It also helps them in understanding the financial strength of the company. Through the financial reports, shareholders can ascertain the earning capacity of the firm and also helps in understanding the present and future conditions for the company. Financial statements are the source that is major in providing information to the investors.

Investors would like to know about the net profit capacity of the company. Net profit depicts the money that is left with the business after all the expenses have been paid. Investors would like to invest in the firm where there are sustainable profits as that will help them in understanding whether the business is performing appropriately or not. Unsustainable profits of the business or the losses do not depict a good position. Investors can decide not to invest in the business. This net profit can be checked through the financial statements of the company (Setyaingruma et al., 2020).

Another important point that investors look into is the sales of the company. The company might have an amazing product but it all depends on the sale of that product as that will bring revenue to the company. Investors care about the growth of sales as it will help them in understanding the demand and will also show that the sales are improving. If the company has no good track record of sales or the sales for the company are deteriorating, investors would not like to invest in the company. There is an initial excitement for the product in the market. But the real sales can be seen once the product has been launched and is working appropriately. Investors like to check the sales and know that there is an upward trend in the demand. The sales figure or the trend for the sales can be read through the income statement of the company as it depicts the revenue that is generated from the products or services of the company. Thus income statement serves as a useful element for the investors.

In any business, cash is the king. Even if there is a plan which is solid for the next 5 years but there is a shortage of cash, it will not work. Employees will not stay as payrolls will be delayed. This is turn will affect the business of the company. Investors are very much interested in knowing the cash position of the organization. It helps them in understanding that business will be able to deal with the problems that are unexpected and also that the business will be able to carry on their function or will be able to grab the opportunities that will come in their way. Free cash flow is the amount that is left with the company after all the expenses have been met. It is a safe amount and the company can invest this amount. If the company is having free cash flows then it shows that operations of the company are sustainable. This will provide satisfaction to the investors as they will not have to worry about the business at any point in time. This free cash flow can be known to the investors through corporate financial reports. The cash flow of the company help in determining the amount that is left for the organization. It shows the exact amount of cash that is available for the business. Thus cash flow statement serves as a useful tool for the business (Chorvatovicova & saxunova, 2016).

Another important aspect for the investor is debt. Debt is a participant that scares the investor because of two reasons. One is because, if the company owns a lot of debt then at the time of liquidation, debt holders get their money back at priority while equity holders get the remaining amount. Also, the larger the debt more the money is paid out and the cash or the profit goes out of the company. This reduces the progress of the organization as the profit or the cash that could be used in growth will go out as interest from the business. In case of emergency, a lesser amount of cash will also create a problem. Investors are interested in knowing the debt position that can be calculated through the debt ratio of the current and long term. This ratio will show whether the company will be able to cover the debt easily or not. The figures for this ratio will be derived from the balance sheet. The balance sheet for the company is prepared under corporate financial reports. Thus, corporate financial reports help investors in various ways. It helps them in understanding the financial position and making decisions whether to invest in the company or not. Through reporting, they can understand the cash position and also the debt position. It gives them an overall view of the business. Thus, helping them in selecting the company to invest the money.

Usefulness of Financial Statements to Creditors

Financial statements provide various useful information to the creditors. These statements offer creditors a look that is comprehensive for the business. Various details like the incomes or the debt or the expenses are an important factor in the profile of the business. Through these financial statements, creditors decide whether the company or the business shows a credit risk that is sound and will the organization be able to repay the debt at times. Creditors look for various aspects of the financial statements. It serves them with important information as only creditors will be able to decide whether or not they are willing to lend them money to the business (Savova & Bachev, 2019).

The current ratio of any organization depicts the position of assets that are current concerning its liabilities. It shows whether a business will be able to handle its current liabilities for the year or not. The current ratio of 1 is expected to be a good ratio. Creditors require this ratio to determine the business's ability in repaying its debt for the year. For this purpose financial statements serves as an important aspect of the business. The balance sheet provides information regarding the current assets and liabilities of the company. This serves as a useful tool for the creditors as through this they decide whether or not to provide a loan to the business.

 Another important aspect for the creditors is the debt to equity ratio. Creditors required this ratio to assess the portion of debt and equity in the business. Through these creditors can understand the usage of debt and equity in the business. This requires the amount of debt and the value of shareholder's equity. These values can be determined through the corporate financial reports. Corporate financial reports help the creditors in estimating the value of debit and credit in the business. Also, it helps them in determining the usage of debt and equity by the business to creditors. Based on this creditors will be able to decide whether or not they should lend the sum to the business. It will help them in knowing whether the funds will be used appropriately or not. Also whether the business will be able to pay off the loans or not.

Creditors while investing their funds in the business would like to know whether the business will be able to pay back their funds or not. They would like to know the source through which the business will be paying off the debt. Cash flow is one major source of repayment of debt for the business. If the cash flow that is existing is not enough for covering the debt then creditors will fall back or think twice before providing the loan. If the trends in the cash flow of the business are increasing then creditors would have a positive image of the organization and they will be sure that the organization will be able to return the amount taken. Depiction of future cash flows will also show the business position. Cash flow will thus be considered as a source of loan repayment for the business. Thus financial reports presented in the corporates show the creditors about the source that can be used by the business for repayment of debt.

Another important use of corporate financial reports to the creditors is to know about the secondary sources of loan repayment. Cash flow is majorly considered as a primary source for repayment of loan. Other sources for loan repayment includes various collateral of the business. It includes the business operated real estate, receivables or inventory, etc. Also receivable turnover brings cash in the business which can serve as an important secondary source for repayment of loan of the business. Businesses that are starting up or the business that is in the phase of expansion might not generate enough cash flows. For knowing their capacity banks can shift to the financial statements and check whether the business is having enough secondary sources to cover the loan repayment (Mihalcea & Hada, 2019). This will help the creditors in analyzing the position of liquidity in a much better way for the business. In case of need, creditors will have an option to liquidate these secondary sources of collateral. These provide a guarantee to the creditors on which they can provide the loan to the company. Thus, corporate financial reports serve as a useful tool for the business as it helps the creditors in analyzing the sources of loan repayment and also the secondary sources for the business. With that, it also helps the creditors in analyzing the useful ratios and then deciding whether or not to provide the funds to the business.

Conclusion on IASB’s Conceptual Framework

Corporate financial statements are the annual statements that are prepared by the business houses. It depicts the position of business to various stakeholders. Investors and creditors are two major stakeholders in the business. Corporate financial statements serve as a useful tool for them. It provides a variety of information to them so that they can make their decision of lending or investing the funds in the business. For investors, corporate financial statements depict the financial information of the business. It shows the position of profit and the trend in the profit-making and also the sales trend of the business. In the same manner for creditors, it shows the financial position of the business. It helps them in analyzing the sources and secondary sources of repayment and also calculates the ratios that help n understanding the liquidity position of the business. Thus, the statements serve a useful purpose to creditors and investors.

References for IASB’s Conceptual Framework

Chorvatovičová, L., & Saxunová, D. (2016). Usefulness of financial statements and annual reports in the process of accounting fraud detection. In Managing Global Changes: Proceedings of the joint international conference (pp. 233-247).

Chukwu, G. J., & Nwabochi, N. (2019). Audit Committee Characteristics and Timeliness of Corporate Financial Reporting in the Nigerian Insurance Industry. International Journal of Managerial Studies and Research, 7(4), 86-95.

Mihalcea, M. M., & Hada, I. D. (2019). Empirical Research on the Utility of Financial-Accounting Information in Considering Performance for Stakeholders. Ovidius University Annals, Economic Sciences Series, 19(2), 798-805.

Savova, K., & Bachev, I. (2019). USEFULNESS OF FINANCIAL INFORMATION AND FRAUD PREVENTION. In 6th SWS International Scientific Conferences on social sciences 2019 (pp. 521-530).

Setyaningruma, D., Siswantorob, D., & Darmastutic, D. (2020). Factors Affecting the Usefulness of Governments’ Financial Statements in Indonesia. International Journal of Innovation, Creativity, and Change, 12(4), 117-134.

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