The conceptual framework for financial reporting sets out the concepts that underlie the preparation and presentation of financial statements for users. The objectives of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. Users of accounting information are classified into internal and external users.
According to the Framework of IAS/IFRS, the underlying assumptions for the preparation of financial statements are accrual basis and going concern basis.
Required:
a) State TWO (2) internal users and TWO (2) external users of accounting information and their information needs. (4 marks)
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Internal users:
Management- Need accounting information(Mgt a/c) to ensure that the different functional areas of the organisation are working together as a corporate body to achieve overall objectives of the organisation rather than their own individual objectives.
Employees-interest lies in seeing that the company keeps on operating (job security), also they want to know if the company is being fair to them ie they are getting a reasonable share of the profit their effort is generating.
Trade Unions– They used the published accounts to decide when to press management for better remuneration and improved condition of service
External Users:
Shareholders– Two kinds of needs – stewardship(how their funds is being used) and investment ( when to buy more shares or sell off their shares)
Bankers- Assess the liquidity of the company.
Creditors- Interested in the liquidity of the company to help them assess if the company will be able to pay them as and when their liability falls due.
Government agencies-GRA– For statutory obligation purposes like payment of corporate taxes.
Stock Market-Regulate the companies and so are interested in their financials.
c) Identify FOUR (4) benefits that financial statements provide to its users. (4 marks)
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- To allow decisions to be made for the good of the company on the value of share-holders investments and the income they derive from their shareholding.
- To allow employees to look for alternative work in a different company, or look for pay increases and promotions based on the financial health of the company.
- To allow trade payables and banks to identify if the company can meets it financial obligations and commitments to them.
- To allow government agencies like revenue Commissioners and Central statistics office make relevant decisions and take needed action.
- To allow accountants audit or prepare tax returns on behalf of the company.