Conceptual Freamework of Financial Statement-2

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7/12/12 HARESH KANSARA

ACCOUNTINGFOR MANAGERS

CONCEPTUAL FREAMEWORK

OFFINANCIAL STATEMENT


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INTRODUCTION

Financial statement nowadays are nolonger meant for just the promoters orowners of an enterprise.

The growing complexities of the modern

day business have put heavy demandson the enterprises in the preparationand presentation of their financialstatement.7/12/12 22HARESH KANSARA


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INTRODUCTION

Now predominant role and influence ofthe regulatory bodies such as SEBI,RBI,IRDA on the operation of the

enterprises.

It is not uncommon now to findcorporate annual reports running intohundred two hundred and even morepages.7/12/12 33HARESH KANSARA


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Users in analysing and interpreting theinformation contained in financialstatement prepared in conformity with

accounting standards. The Accounting Standards Board of the

ICAI in the development of futureaccounting standards and in its review

of existing ones relating to thepreparation and presentation of financialstatement for reducing the number ofalternative accounting treatmentspermitted by accounting standards.7/12/12 HARESH KANSARA 55


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SCOPE OF THE FRAMEWORK

Components of financial statement

Objective of financial statement

Users and their information needs Underlying assumptions

Qualitative characteristics and

constraints on relevant and reliableinformation

Elements of financial statement

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Components of financialstatement

Financial statements are the mostimportant part of financial reporting. Acomplete set of financial statement

comprises: Balance sheet

Statement of profit and loss

Cash flow statement

Notes to account and accounting policies

Items such as directors report,

chairmans statements, management7/12/12 77HARESH KANSARA


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Objective of financialstatement

The Objective of financial statementis to provide information about thefinancial position, performance and

cash flows of an enterprise to helpthe various users carry out anevaluation of the ability of the

enterprises to generate cash andcash equivalents and of the timingcertainty of generation for necessarydecision making.

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However they do not provide all theinformation that users may needsas

They largely portray the financial effectsof past events

Throw little light on the future direction

of growth Do not necessarily provide non-financial

information

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Financial position: the financialposition of an enterprise depends onthe economic resources It controls,

its financial structure liquiditysolvency and capacity to adapt tochanges in the environment in which

it operates. Economic sources

Financial structure

Liquidity and solvency7/12/12 HARESH KANSARA 1010


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Performance: Performance of anenterprise in particular itsprofitability leads to assessment of

potential change in the economicresources that it is likely to control inthe future.

Cash flows: cash flows information ofan enterprise is useful in evaluatingits investing financing and operating

activities.7/12/12 HARESH KANSARA 1111


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USERS AND THEIR INFORMATIONNEEDS

Present and potential investors beingthe key stakeholders and risk capitalproviders are concerned with the return

on their investments and the risksinherent therein.

Employees and their representative

groups need information about thestability and profitability of theiremployer enterprise.

Lenders need information that enables7/12/12 HARESH KANSARA 1212


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Suppliers and other trade creditorsneed information that enables themto determaine whether amounts

owing to them will be paid in time. Customers need information about

the quality of products, credit policy

and the continuance of theenterprise.

Government and their agencies are

interested in the activities of7/12/12 HARESH KANSARA 1313


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Public need information about thetrand and recent developments inthe prosperity of the enterprise and

the range of its activities particularlythose that effect them.

Management is interested in the

information contained in the financialstatement to evaluate its ownperformance devise growth plans for

the enterprise.7/12/12 HARESH KANSARA 1414


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UNDERLYING ASSUMPTIONS

Accrual basis: The meaning ofaccrual is something that becomesdue especially an amount of money

that is yet to be paid or received atthe end of the accounting period. Itmeans that revenues are recognised

when they become receivable.Though cash is received or notreceived and the expenses arerecognised when they becomeayable though cash is aid or not7/12/12 HARESH KANSARA 1515


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Going concern: This states that abusiness firm will continue to carryon its activities for an indefinite

period of time. Simply stated, itmeans that every business entity hascontinuity of life. Thus, it will not be

dissolved in the near future. Itprovides a basis for showing thevalue of assets in the balance sheet

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Consistency: The convention ofconsistency means that sameaccounting principles should be used

for preparing financial statementsyear after year. A meaningfulconclusion can be drawn from

financial statements of the sameenterprise when there is comparisonbetween them over a period of time.But this can be possible only whenaccounting olicies and ractices7/12/12 HARESH KANSARA 1717


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Conceptual Freamework of Financial Statement-2

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