External Financial Reporting Decisions

 

.1 Financial Accounting (concepts)

1. The objective of General-Purpose Financial Reporting

a. To report financially information that is making

b. Information about economic resources and claims helps to evaluate, liquidity, solvency and financing needs.

c. the entity's performance ( income statement) and -events and transactions, such as issuing debt and equity (balance sheet) (1. The return on economic resources 2. Evaluating management and 3. Predicting future returns)

2. Users financial Statements

a. External users use financial statements to determine whether doing business with the firm will be beneficial

1. Users with direct economic interests. A) Investors or potential investors B. suppliers and creditors

2. Users with indirect economic interests a) Financial advisor and analysts, b) Stock markets or exchanges c) Regulatory authorities

b) Internal Users use financial statements to make decision affecting the operations of the business

1) Management needs to assess financial strengths and deficiencies to evaluate performance, and to for future financial goals

2) Employees want wages and benefits based on the increase productivity

 

3. Features of Financial Statement

a. Financial Statements, notes and other disclosures are the communication means to external parties

b. A full set of financial statements includes the following statement

1. Statement of financial position ( aslo called a balance

2. Income statement

3. Statement of Comprehensive income

4. Statement of changes in equity

5. Statement of cash flows

c. to be useful, information presented in the financial statement must be relevant, faithfully represented and comparable with similar information for other entities and the same entity for another period or date. To allows users to understand similarities and differences.

d. Going-concern assumption, which means that the entity is assumed to continue operation indefinitely. As a result, liquidation values are not important.

 

Financial Statement Relationships

Financial Statements complement each other. They describe different aspects of the same transactions.

1.       Net income or loss from the statement of income is reported and accumulated in the retained earnings account, a component of the equity section of the statement of financial position.

2.       The components of cash and equivalents from the statement of financial position are reconciled with the statement of cash flows.

3.       Items of equity from the statement of financial position are reconciled with the beginning balances on the statement of changes in equity.

4.       4. Ending inventories are reported in current assets on the statement of financial position and are reflected in the calculation of cost of goods sold on the statement of income.

5. Amortization and depreciation reported in the statement of income also are reflected in asset and liabilities balances in the statement of financial position.

 

5.       Accrual Basis of Accounting

a.       Accrual accounting records the financial effects of transactions and other events and circumstances when they occur rather than their cash is paid or received.

1. Revenues are recognized in the period in which they were earned events and cash will be received in a future period.

2. Expenses are recognized in the period in which they were incurred even if the cash will be paid in a future period.

 

 

 

Planning

Planning is determination of what should be done, how it should be done, when it should be done, where it should be done and who should do it. Planning is done for both financial (usually through a budget) and non-financial items (production). Planning does not occur in a vacuum. It must consider external influences that will impact the company’s operations and budgets such as: (industry, Country of international Environment, Macro-Environment)

Setting Goals and Objectives

The bases of the planning process are the goals and objectives of the company. Without these, there can be no efficient or effective planning. The plan is established to help the company achieve its goals and objectives

 

Objectives are generally made at the organizational level and goals at the divisional level. The objectives do not need to be agreed to by each employee, but they do not need to be accepted by everyone. *The means that even if an employee does not agree with the plan, they still need to act in accordance with the plan

 

Objectives and goals must be: Prioritized, Clearly stated, specific and Communicated to employees

Goals and objectives are measured in respect to their efficiency and effectiveness

*Effectiveness is whether the goal was reached

*Efficiency is whether it was reached using the fewest resources

 Different Types of Plans

*Long-term (strategic plans) -Five years or more based on long-term objectives and tend not to be specific or detailed. More what is to be done rather than how it is to be done. Made by company's top management. Looks at strategies, objectives and goals of the company, and internal/external factors affecting the company

*Intermediate (tactical) plan-one to five years. Implement specific parts of the strategic plan. Made by upper and middle managers

 

*Short-term (operational plans-Less than 1year in time. Related usually to production, materials requirements, staffing, cash flows and the income statement. *Development by middle or low level managers. *Primary basis for budgets. *Provide the basis to develop programs, policies and performance expectations required to achieve the company's long-terms strategic goals

 

Planning, budgeting, and performance evaluation are interrelated and inseparable.  The process is:

1.       Management develops the plan consisting of goals, objectives and a proposed action plan for the future

2.       The plan developed by management lead to the formulation of the budget. The budget expresses management's pans in quantitative terms.

3.       Budgets can lead to changes in plans and strategies because they provide feedback to the planning process. Managers may revise their plans based on this feedback. This back and forth exchange may occur for several iterations before the plans and budgets are adopted.

4.       Once the plans and budgets are finalized, the company implements the plans to achieve its goals.

5.       Actual results are compared to the plan, The budget is a control tools

6.       Sometimes this control will result in at the revision of prior plans and goals or in formulation of new plans,, changes in operations and revision to the budget

7.       Changed conditions during the year will be used in planning for the next period.


Budgeting

A budget is a quantitative (numerical) expression of the company's plans and objectives

The master budget is the final, complete budget for the upcoming time period. However, the master budget is composed of many, smaller budgets that are developed for departments, divisions, and individual products

*Operation budgets are used to identify the resources that will be needed by the individual unites to carry our planned activities

*Financial budgets identify the sources and users of fund for the budgeted operations

 

Advantages of Budgets 

*Provide coordination and communication among organization units and activities

*Provide a framework for measuring performance

*Provide motivation for managers and employees to achieve the company's plans

*Promote the efficient allocation of organizational resources

*Provide a means for controlling operations

*Provide a means to check on progress toward the organization’s objectives

 

What are the characteristics of successful budgeting?