Financial statements are prepared in accordance with what? What governing bodies set accounting standards? Why do you think financial statements are required to be prepared using the same standards?
Financial statements are considered to be means of communication as it communicates the financial performance of company to its stakeholders. It is also being used as basis for comparing its performance with its competitors, industry and to see its position in industry. Comparison can be made if all prepare financial statements by following some standard rules of preparation of financial statements. If uniformity is there then it will be easier for stakeholders to understand financial statements. These statements are used by a variety of internal and external users including stockholders, investors, creditors, regulators, employees and senior management.
These statements information needs depends upon the kinds of decisions the user want to make. The users are interested to know how firm is doing in terms of its profitability, its financial position and its overall capacity to meet obligations and expectations of stakeholders. In other words users of financial statements are interested in earning power of the company.
To be more precise Creditors like to see earning power which will show estimated future earnings of the company. If earnings are good it shows that the repayment capacity of the firm will be good. Based on such kind of analysis creditors will decide to supply merchandize on credit basis.
These statements are important for creditors since the accounting information showed in financial statement will help them to evaluate the risks of granting credit or lending money. If they come to conclusion that, risk is low then they will definitely provide credit and vice-versa.
The common rules or set of standards are called as Generally Accepted Accounting Standards (GAAP) which will indicate how These statements or reports need to be prepared. These standards work as a guidance for preparation and following methods of accounting to be followed by all.
Accounting process works on two basic assumptions. These assumptions are monetary unit assumption and the economic entity assumption. The first assumption i.e. monetary unit assumption indicates recording only monetary transactions of business whereas the second assumption says that economic entity can be any organization or unit of a society. This assumption gives emphasis on differentiation of owner and entity.
In U.S. these set of rules or standards are issued by Financial Accounting Standards Board (FASB). Countries outside U.S. use standards issued by International Accounting Standards Board (IASB).
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