Theory and Current Issues in Accounting

Executive Summary of Theory and Current Issues in Accounting

The report summarizes the financial reporting and the general purpose for financial statements. Financial reporting discloses the information at intervals while statements are the ones containing the information for the user. The report also discusses the professionality and accountability ethics of accountants that are linked with the stewardship theory as both expect the accountant to work in the best interest of the organization. The objective of general purpose financial statements is to provide information to the users. While in the end it is recommended in the report that future values and better narratives should be added in the statements.

Introduction to Theory and Current Issues in Accounting

Financial reporting in the business does periodical reporting that provides pecuniary information to the owners of the business. While general-purpose financial statements are the statements that are issued throughout the year to the investors and the creditors for making their decision. The basic or the main objective of the general-purpose reports is to provide the financial information. The report is aimed at studying the financial reporting and general-purpose financial statements. Also, the ethical professional behavior and accountability of accountants will be studied in respect of stewardship theory. Other than that use of the financial reports, the relevance of financial reporting for making the decisions, and the possible improvements that are required in the reporting to meet the needs of users and resolve the disputes in accounting will be studied.

Financial Reporting

Financial reporting refers to the disclosure of financial results and various information that is related to the management and the stakeholders that are external like investors, regulators, and customers. The information provided is financial and shows how the company is performing for the period for which statements are made or the reporting is done. Financial reports are issued usually on an annual or quarterly basis and include the balance sheet, cash flow, statement of equity, and income statement (Acharya & Ryan, 2016).

Financial reporting for the companies i.e. public and private are performed in respect of generally accepted accounting guidelines. Companies usually opt for International Financial Reporting Standards for preparing the financial reports. These standards help in ensuring the consistency, accuracy, and also the comparability for the results of finances.

General Purpose Financial Statements

General-purpose financial statements are issued at various points of time in the year to provide an aid to the investors and the creditors to make their decisions. The same statements are presented that are used for financial reporting. These statements are called 'general purpose' because the information that is consisted of the statements can be used by people for activities of broad range (Drake, Hales & Rees, 2019). These are the statements that are used by the company for financial reporting.

For example, Both the investor and the creditor can analyze the financial statements set for predicting the performance of the company and also the ability of the company for paying off its debt that is due currently and also in the future.

All the public companies are supposed to issue the general-purpose statements which are audited. Mostly the companies issue earning reports that are quarterly and also the statements annually. This helps the investor in providing more information that is financial about the company and make the decisions.

Ethical Professional Behavior and Accountability of Accountants on Financial Reporting Through Stewardship Theory

In the profession of accounting or any other profession, it is required that ethical guidelines are followed as it brings trustworthiness and also the judgments in a positive manner for financial reporting. Accountants are the ones who deal with the financial details of the organization and individuals. The Code of ethics are the fundamentals that are to be abided by the accountants for maintaining professionalism and accountability.

Professional behavior of ethics requires accountants to work in compliance with the regulation and the laws that govern the bodies of work and the jurisdiction. Also, accountants are required to avoid actions that will affect negatively on the professional reputation and this is also a commitment that is reasonable and can be expected as per the ethical conduct of professional behavior (Jaijairam, 2017). The code of ethics should be followed by the accountant even if they are left on their own.

While accountability is the ethical behavior that includes answerability, liability, blameworthiness, and also the expectation of giving a true view of the account by the accountant. Accountants are required to act in good faith and honestly. They are required to take responsibility for their actions and be ready to face the consequences. These ethics are as per the stewardship theory.

The theory of stewardship states that even if the managers are left on their own, they will be acting as a steward who is responsible for the assets that are under their control. It is assumed in the theory that if there is a choice between the self-serving behaviors and pro-organization than the steward will place a value that is higher on the cooperation than the defection.

If the accountant follows the professional and accountability ethic than he will be responsible for the actions he takes and the decisions made by him. Assets that are in his control will be dealt with in a manner he decided appropriate. So, as per the ethical behavior, it is required that the accountant acts responsibly and takes decisions that are best for the form which matches with the theory of stewardship. So, ethical conduct of professionalism and accountability are as per the theory of stewardship. An accountant working ethically will be working according to the stewardship theory.

Objective of General Purpose Financial Reporting

The objective of general purpose financial reporting as per the Accounting framework, 2019 para 26 and 27 are as follows:

  • According to the needs of information for the user, the objective of general-purpose financial reporting is to provide information to the users that help them in making and evaluating the decisions about the allocation of the scarce resources.
  • When this objective is met by the general purpose financial reporting, they also will become a means by which the governing bodies and the management can discharge their accountability to the users. The accountability provision of information is an important aspect in the functioning of general purpose financial reporting which is particularly related to the entities that are public and also the non-business entities that are there in the private sector (Hope & Vyas, 2017). However, accountability objective is surpassed by a bigger objective of providing information that is useful in the evaluation and making decisions for the resources that are scarce as in the end-users will require information that is used for resource allocation.

Financial Information to Be Presented for Fulfilling the Objective

The information that is required by the user for evaluating and making the decision of resource allocation is as follows:

  • Disclosing the revenues that are generated by the entity and the expenses that have been incurred for generating the revenue with the assets, liabilities, and equity of the organization at the end of the financial year will help the user in assessing the financial information.
  • Information about the policies of the government that will affect the operation in deciding the breakeven point or the target return on assets etc.
  • Financial structure information, solvency position, adaptation depicts the financial position of the company.
  • Resource information that is owned by the company, types of finances that are being used by the company and the assets that are being used by the organization helps in evaluating the allocation of scarce resources.
  • Investing disclosures of the company are helpful for the users in understanding that resources have been used for the purpose. Thus, these are the various information that is to be presented for fulfilling the objective.

Critical Evaluation

The preparation of financial statement is merely a support to objective of accountability and they are no use to potential investors does not support the vision or the objective that is presented in the accounting framework in which it is stated that the financial reports help the user in deciding on the evaluation of the company.

Without the availability of the users of the financial reports like investors won't be able to know the value of the firm. They won't be able to judge the solvency position of the company and also the market value of the company will remain unknown. Whether the company is using its funds in the right direction or not will remain unknown. With that whether there are profits made or the cost that is being incurred is appropriate or not will not be known to the users. These are the information like how the resources are being used, what funds are used, how the company is financing its asset is depicted through the statements. By this, the user can understand the position. Without this information, the user will be investing in the dark where they are unaware of the finances of the company. Thus, financial statements are a support for the objective and at the same time, they are very essential for the users.

Principal Elements of Relevance

Confirmatory and predictive roles serve as the principal elements of relevance for decision usefulness objectives. Predictive value concepts states that the information should have a value that is predictive so that inputs can be made and outcomes can be depicted. While confirmatory value shows the evaluation of the prior information.

These two elements are important for decision making. The main purpose of financial statements to the user is that through them he or she can derive the financial information and then analyze and form a trend about the performance of the company (Almujamed & Alfraih, 2019). The trend for the performance of the company can be created only if the values are confirmatory and can be evaluated. In the same manner, when someone decides to invest in the company, they like to predict a trend from the information that is available so that they can expect returns. Then only the information that is provided to them will be relevant as according to the concept relevant information should be able to make changes in the decisions and till the values are not predictable or confirmatory, the relevancy of information won't be served.

Recommendation for Improvements

Financial reporting includes most parts of the business about how the company has performed and also certain information about what are the next steps that the company is planning to take. But, with that when a user invests in the business, they like to know more about the growth the company will make in the future. With the current information and actions that are to be taken company should depict the future balance sheet of the next year as they have the best information available. This will also help the user in understanding the progress of the company.

In the same manner, narrative reporting that is done should be clearer. Accounting information cannot be understood by everyone so for the purpose company should depict the position of the market and the value they will be able to create. These two items can be added and financial reporting can be improved for the company.

Conclusion on Theory and Current Issues in Accounting

Financial reporting refers to information that is provided to the users on a yearly or quarterly basis. The information is financial and helps users in making the decision. While general-purpose financial statements are the statements that consist of all the information about the company. The statements include a balance sheet, cash flow, income statement, etc. The ethical standard of professionalism and accountability for accountants works with stewardship theory where they both state that an accountant should be responsible and work in the best professional capacity. The objective for financial statements as per accounting standard is to provide user appropriate useful information. While financial statements serve an important role in the user's decision making. The relevance of information can be understood with the confirmatory and predictability feature as then only the user will be able to derive the maximum benefits. Future values and clearer narrative are the changes that should be made in the financial statements.

References for Theory and Current Issues in Accounting

Acharya, V. V., & Ryan, S. G. (2016). Banks’ financial reporting and financial system stability. Journal of Accounting Research54(2), 277-340.

Almujamed, H. I., & Alfraih, M. M. (2019). Have accounting measures lost their usefulness after the 2008 global financial crisis?. Journal of Financial Reporting and Accounting. Retrieved from: https://www.emerald.com/insight/content/doi/10.1108/JFRA-05-2018-0035/full/html

Drake, M. S., Hales, J., & Rees, L. (2019). Disclosure Overload? A Professional User Perspective on the Usefulness of General Purpose Financial Statements. Contemporary Accounting Research36(4).

Hope, O. K., & Vyas, D. (2017). Private company finance and financial reporting. Accounting and Business Research47(5), 506-537.

Jaijairam, P. (2017). Ethics in Accounting. Journal of finance and accountancy23, 1-13.

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