Charting a Company’s Direction

Name

Institutional Affiliation

Task 1: Financial Statement Analysis

Question 1

The analysis of a company’s financial statements helps provide the information needed by analysts, creditors, and investors in the evaluation of the company’s financial performance. At the same time, some of the information provided in these statements is usually a requirement by the accounting standards or by law. The financial statements are a good communication tool for the accomplishments that the company has so far made, especially to external parties interested in the company, such as analysts, media, and investors. This is the manner through which management communicates with the external parties. Senior management within the company is able to use financial statements as effective tools for detailing the successes that the company has achieved in the past as well as the expectations it has for the future (Way, 2019). The industry’s needs are met as the first steps in the analysis of financial statements since creditors and investors have invested in the company, and they would use the evaluation as a tool for identifying the profitability of their investments. This is due to the fact that they are the source of finance for the company’s operations. In light of this, the company has to prove that indeed the money is being put to good use, and it is standing out in the industry as a good performer, having met all the industrial requirements and standards set for good performance.

Question 2

Relevance, in light of accounting information in the context of valuation methodology and disclosure, basically means the capability of users to make predictions on past, present, and future outcomes, or making a confirmation of prior expectations. Relevant information helps make a difference in decision making by improving the user’s capabilities in prediction or giving feedback on prior expectations (Board, 2008). Representational faithfulness, on the other hand, is the ability of available information to give a fair and true view, while being presented fairly, especially touching on financial statement information (Alexander & Archer, 2003). In line with this, such information plays a key role in creative accounting as well as in the opinion statements provided by an auditor (. Such information is free from bias and material error, thus showing its relevance.

In the event that the highest relevance is present in the selection of accounting method, representational faithfulness is still considered important even though it is considered next. Relevance is considered first owing to it being essential. They are both important for decision usefulness. With the presence of both, then information is reliable, non-biased, neutral, free from material error, and complete, thus dependable (Di Pietra, McLeay, & Ronen, 2014). Therefore, neither can be absent. In the event that they are both absent, the decision loses meaning when information provided has material error, bias, is incomplete, not neutral, and non-verifiable. This means that accounting information has to have both characteristics: relevance and representational faithfulness for decisions to be useful and dependable.

Task 2

There are various challenges that are presented in the understanding and reporting of cash flows and taxes, especially when looking the operations of businesses. Going concern and liquidity is one of the challenges. The survival of businesses is based on their ability to have cash flow to help the company stay afloat. Management is required to conduct an assessment on businesses to identify the ability of the business to continue as a going concern. Financial statement analysis helps make this clear. In the event that the business is not able to continue as a going concern, the business is forced to inject additional income into the business to prevent bankruptcy (van der Tas, 2020). At the same time, if the economic climate is unfriendly, the government may consider tax reduction for businesses to stay afloat and the economy to continue thriving.

Assessment of impairment on business assets is yet another challenge. Nonfinancial assets being impaired means the sale or use of the asset cannot acquire the carrying value of the asset. This may mean greater losses to business and possibly, cash flow needed to be injected into improving the asset for use or sale. Given the changing assumptions of market participants at certain market conditions when it comes to measurement of fair value, some economic climates may call for more depressing fair value measurement considerations, which may mean much lower value to businesses (van der Tas, 2020). This also means much lower cash flow available to businesses to continue keeping the operations staying afloat. In the event that the economic climate is suffering on the basis of an event that affects business, then the government is expected to come in and provide responses that help provide cushioning to businesses. This can come in form of subsidies, public levy reductions, credit and tax reductions, loans on low interest, reductions in rent, and tax exemptions. To ensure that businesses stay afloat even in pressing economic times, the government has to ensure that relevant laws have been enacted. Businesses will need to consider whether a government grant received or a tax reduction will help provide relief to operations (Info Entrepreneurs, 2019). For cash flow maximization, there ought to be effectiveness in debt control and credit management, while still ensuring effectiveness in supplier management and stock control.

References

Alexander, D., & Archer, S. (2003). On economic reality, representational faithfulness and the ‘true and fair override’. Accounting and Business Research, 33(1), 3-17.

Board, F. A. S. (2008). Statement of financial accounting concepts No. 2: qualitative characteristics of accounting information. Financ Acc Stand Board.Di Pietra, R., McLeay, S., & Ronen, J. (Eds.). (2014). Accounting and regulation: New insights on governance, markets and institutions. Springer Science & Business Media.Info Entrepreneurs. (2019). The challenges of growing a business – and how to meet them. Info Entrepreneurs. https://www.infoentrepreneurs.org/en/guides/the-challenges-of-growing-a-business—and-how-to-meet-them/Van der Tas, L. (2020, April 2). Five financial reporting Issues to consider as a consequence of COVID-19. EY. https://www.ey.com/en_gl/assurance/five-financial-reporting-issues-to-consider-as-a-consequence-of-covid-19Way, J. (2019, February 4). What Is the Importance of a Company’s Financial Statements? Chron. https://smallbusiness.chron.com/importance-companys-financial-statements-21332.html