Purpose and presentation of financial information

Purpose and presentation of financial information 

Introduction 

Financial information refers to the information prepared by every company regarding its accounts and activities throughout the year. It contains all the data which is necessary to be maintained by the company and which presents all the financial transactions of the company. 

Example

· Sales of inventory

· Borrowing 

· Purchase of goods, assets, or inventory

Financial information consists of five things which are

· Income statement 

· Statement of financial position

· Change in equity statement 

· Cash flow statement

· Notes to the account

The purpose of preparation of financial information

Financial information gives all the necessary details of the company and these give the best look about the financial position and condition of the company. Usually, it is required by law and is mandatory for the companies to prepare the financial information but it also gives a great understanding of the performance of the company throughout the year for which financial information has been prepared. It also gives necessary information about the company that is needed by different stakeholders for making different decisions about their investments or financial decisions (Cardinaels, 2010).

Perspective of stakeholders 

 It is important for most stakeholders to understand and examine the financial information and financial progress of the company for any specific year as they have some or other stake in the company. There are different kinds of stakeholders for any company and these stakeholders have their own interests in the company. In most cases, these interests and stakes are based on some sort of financial information because of which they need to examine the financial information of the company (Kelton, 2012).

Categories of stakeholders

Stakeholders can be divided into two categories i.e. internal and external stakeholders. Internal stakeholders include employees, workers, directors and investors which are within the business. On the other hand, external stakeholders include banks, creditors, debtors, customers, and many others who have some sort of relation with the company and are not internal.

Internal stakeholders

Discussing internal stakeholders, as shareholders have invested their shares in the company and they want to know how the company is progressing and what has the company earned throughout the year, what has company earned and from where it has earned, what sort of transactions the company does in general to earn revenue. All these questions are answered in the financial statements. For shareholders all five parts of financial statements are important.

Financial information tells about the profit the company has earned, the assets the company possess in the whole year, and relying on this profit and assets the shareholders decide either to increase their investment in the company or to discard their shares from the company. Managers and workers examine the condition of the company through its financial statements to understand and evaluate the chances of their promotion and development in the company as well as the chances of their survival in the market if the condition of the company is worst and it is expected to be wind up nearly then managers and workers try to find a new job. For this purpose, they need to remain informed and aware of the condition of finance of the company which can accurately be done with the help of financial statements.

External stakeholders

Apart from internal stakeholders of the company, external stakeholders also have to rely on the information of the financial information of the company for their purpose. For example, creditors need to be aware of the financial information and sale of the company to decide how much credit to be provided to the company. Banks and other financial institutions need to be aware of the current ration and assets of the company to make sure that the company would be in a position to repay the loan that they are granting to the company. If the company has a very low current ratio than it means that the company has a high burden of the liabilities and they have relatively fewer assets than that of the liabilities and therefore they might not become able to repay the loan of the bank if the bank grants them the loan. This information can be extracted and evaluated by the use of the financial statements of the company. Therefore, it is very important and mandatory for the companies to prepare financial statements and show all the accounts of their company by fairly presenting all the financial transactions it has done throughout the years.

Decision making based on financial statements

All these and other stakeholders rely on financial statements of the company to get the respective information of the company that is needed by them to take various types of decisions as have been discussed above. Shareholders take the decision to either increase or decrease their investment in the company based on the profitability of the company and the dividend payment policy of the company. Managers and workers take the decision to continue their job or to quit their job in the company based on the reputation and growth of the company in the market. Creditors set the credit limit of the company based on the sale, revenue, and current ratio of the company. Banks and other financial institutions take the decision to give loans to the company and to extend the loan repayment period of the company based on the assets availability, current ratio, asset ratio of the company, and the progress of the company if they need some time to repay the loan and they are doing well in term of earning and becoming able to repay the loan.

Financial statements should be prepared according to the needs of its stakeholders as stakeholders want to get a different kind of information from the financial statements. As has been discussed above that the different kinds of stakeholders need a different kind of information from financial statements. Financial statements need that kind of presentation that covers all the needs of these stakeholders but before presenting all the information that is needed by stakeholders, it is more important than the information in the financial information should be correct, true, fairly presented, and reliable. If information is truly presented and is reliable only then the stakeholders can believe in it. Therefore, it is important to present all the information truly and fairly in the financial statements. Correct presentation for the decisions of stakeholders refer to the presentation of correct profit and dividend announced as these are needed to use by shareholders, correct presentation of current assets and current liabilities and overall assets and liabilities as these are used by banks to evaluate whether the company would be able to repay the loan of the company and correct presentation of cash in hand and cash at bank available as this information is used by creditors to adjust credit limit of the company. In this way, the correct presentation of all the information can help various users of financial statements to make their decision early and in a better way (Ghani, 2011).

It is also important to compare the financial information for two years of the same company as it shows what progress the company has made during the year. If the company has made some positive progress than it means stakeholders can rely on the company and they can invest in the company.

Evaluation of financial information

  2020 2019
OMR 000 OMR 000
Revenue 697,990 631,440
Cost of Sales 418,794 378,864
Operating Expenses 196,975 178,663
Finance cost 12020 13005
Tax for the year ended31/12 2,106 1,827
Tangible assets 394,831 332,215
Inventories 7,542 6,111
Prepayments 884 537
Cash and cash equivalents 5660 5,082
Share capital 150000 150000
Retain earnings as at 01/01 138,240 79,159
Long term Bank Loan 48,976 51,678
Trade payable 1,500 2,200
Current tax liability 2,106 1,827

The financial information of the company shows that the company has increased the sale in 2020 with 66,550 which shows that it is going on the right path with regard to sale or revenue. The information also shows that the percentage increase in sales in the year 2020 is 1.105394 which is the same percentage increase in the cost of sale. This tells that company has incurred the same amount of cost for the sale of 1 unit that it had incurred last year. The operating expense of the company has been increased by 1.102495 percent. Finance expenses of the company have been decreased by 0.92426 percent which means that the company has repaid some amount of loan and the interest on that amount of loan has been decreased. The tax expense of the company has also been increased for the company by 1.152709 percent which shows that the taxable profit of the company has been increased. The company has also purchased new tangible assets as the tangible assets of the company have been increased by 1.18848 percent. Inventories of the company have also been increased. Prepayment by the company has also been increased by 1.646182 percent. The company has also increased cash in hand or in the bank with a percentage of 1.113735. All this information shows that the company has done well in the year as its assets have been increasing and some portion of the cost has been decreased. The share capital has remained the same as the company has not issued any shares during the current period. Retained earnings have been increased by 1.746359 percent as profit for the year has been added in retained earnings. Profit in the current year that the company has earned is 68,095. This profit is added in last year’s retained earnings and the dividend has been subtracted from the result to calculate total retained earnings of this year. This information evaluates that the company has given the dividend for the amount of 9,014. The company has given back some part of the bank loan which can be certified by two line items i.e. directly comparing the loan payable of two years and also by evaluating that in the current year, the interest expense has been decreased which shows that the amount of the loan has been reduced. Trade payables have also been reduced which shows that the company is repaying the payables in time. The current tax payable of this year has been increased as these are shown and can also be assumed as an increase in sales or profit results in a higher amount of current tax payables (Maines, 2020).

Conclusion

This all concludes that it is important to prepare financial information truly and in the right presentation as this would give benefit to understand and evaluate the financial position and performance of the company. Stakeholders need to evaluate this type of information before their major decisions. In the end, the evaluation and comparison of two years of financial information have been made which shows that the company has increased the profit and has also succeeded in reducing the long term loan as well as financial expenses. This company has made progress in the right way which means various stakeholders can believe in this company to invest their investment in this company.

Reference

Cardinaels, E. and van Veen-Dirks, P.M., 2010. Financial versus non-financial information: The impact of information organization and presentation in a Balanced Scorecard. Accounting, Organizations and Society35(6), pp.565-578.

Kelton, A.S. and Pennington, R.R., 2012. Internet financial reporting: The effects of information presentation format and content differences on investor decision making. Computers in Human Behavior28(4), pp.1178-1185.

Ghani, E.K., Laswad, F. and Tooley, S., 2011. Functional fixation: Experimental evidence on the presentation of financial information through different digital formats. The British Accounting Review43(3), pp.186-199.

Maines, L.A. and McDaniel, L.S., 2000. Effects of comprehensive‐income characteristics on nonprofessional investors’ judgments: The role of financial‐statement presentation format. The accounting review75(2), pp.179-207.

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