Financial statements are prepared in accordance with what? What governing bodies set accounting standards? Why do you think should be the financial statements prepared using the same standards?
Financial statements are considered communication as it communicates the financial performance of the company to its stakeholders. It is also used as a basis for comparing its performance with its competitors, to see the industry and its position in the industry. Comparison can be made if all financial statements prepared by following a few standard rules of preparing the financial statements. If uniformity is then easier for interested parties will be to understand the financial statements. These statements are used by a variety of internal and external users, including shareholders, investors, creditors, regulators, employees and senior management.
These statements have information needed depends on the type of decisions to create the user. The users are interested to know how the company is doing in terms of meeting the profitability, financial position and the total capacity of the requirements and expectations of stakeholders. In other words, users of financial statements are interested in earning power of the company.
In order to make precise Creditors power that will show you expected future earnings of the company. If earnings are apparent that the repayment capacity of the company will be good. On the basis of such a form of analysis creditors will decide to deliver merchandise on credit basis.
These statements are important for the creditors, since the accounting information showed will help them in the financial statement to borrow to evaluate the risks of granting credit or money. When they come to the conclusion that the risk is low then they will definitely provide credit and vice versa.
Common rules or a set of standards known as Generally Accepted Accounting Standards (GAAP), which will indicate how these statements or reports should be prepared. These standards act as a guideline for the preparation and the following methods of accounting should be followed by everyone.
Accounting process works on two principles. These assumptions are monetary unit assumption and the economic entity assumption. The first assumption ie currency assumption indicates the recording only monetary transactions of business, while the second assumption says that the economic unit can be any organization or unit of a society. This assumption gives emphasis on differentiation of the owner and the entity.
US this set of rules or standards issued by the Financial Accounting Standards Board (FASB). Countries outside the US use standards issued by the International Accounting Standards Board (IASB).
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