Factors Affecting Financial Reporting Quality

Factors Affecting fiscal inform QualityFinancial inform StandardsFinancial Reporting Standards (FRSs) and Accounting fancys influence the production and intromission of financial statements. The FRSs that influence the production of financial statements argonFRS 3 Reporting Financial PerformanceThe FRS sets forth the basis for presentation of general purpose financial statements in a manner that ensures comparability. As the FRS requires reporting entities to highlight financial performance to aid the practicers in understanding the performance achieved, it sets out the overall frame workplace for the presentation of financial statements. It also lays smooth the guidelines for the structure of financial statements and defines the overall settings for financial statements, much(prenominal) as fair presentation, accrual basis of accounting, consistency of presentation, materiality and aggregation, and relative information.This impacts the commission profit and financial performance is reported and also the paygrade of the assets and liabilities. It helps the users of accounts comp atomic number 18 financial statements both with the entitys financial statements of previous arrests and with the financial statements of some other entities.FRS 15 Tangible Fixed AssetsFRS 15 sets out the principles of accounting for initial measurement valuation and disparagement. It ensures that tangible fixed assets atomic number 18 accounted for on a consistent basis. It requires residual values to be reviewed at each balance sheet date.This impacts the valuation of tangible fixed assets.IAS 2 Valuation of InventoriesThis accounting standard sets out the accounting treatment for inventories. It provides focal point for determining the cost of inventories. It is out-of-pocket to this standard a loss due to damaged goods is excluded from inventory cost.The three concepts that fall in influenced the production of the financial statements areAccrual conceptThe f inancial statements feed been prepared on an accruals basis. The accrual concept, also known as matching principle, requires that transactions are reflected in the accounts of the period to which they relate to and not in the period in which payments are made or received. reach of Accrual concept on pull aheadWhen a trading and profit loss account for a period is compiled, the cost of goods sold relevant to the sales made during the period should be recorded accurately and in full in that account. bes and incomes appertaining a future period such as prepaying expenses and pre-received income must be carried frontward as a prepayment for that period and not charged in the current profit statement. For example, pre pay general administrative expenses would be carried forward to the period they relate to. Similarly, expenses accrued or income accrued allow for be included in the current periods profit statement by delegacy of an accruals adjustment. For example, manufacturing wages accrued will be added to manufacturing wages for the current period. restore of Accrual Concept on Assets / LiabilitiesAll prepaid expenses and accrued income will be interact as assets and accrued expenses and pre-received incomes will be treated as liabilities. acquittance Concern ConceptGoing contact concept is a part of UK statute law. This concept assumes that the business under consideration will remain in creation for the foresee sufficient future. Without this concept, accounts will have to be d unrefinedn up on the basis of what the business is credibly to be worth if it is sold gradually at the date of the accounts. sham of Going Concern Concept on realizeWhen an entity has a muniment of profitable operations and has a ready access to financial resources, unrivalled chiffonier conclude that the organisation will remain in existence for the foreseeable future. For example, as Appleby Oakley and Company has regularly been making profits, unity washbasin comf ortably draw a conclusion on going concern concept.Impact of Going Concern Concept on Assets / LiabilitiesGoing concern concept impacts the valuation of assets and liabilities. Due to the going concern concept, the values situated on continuing business assets and liabilities are different from the value lay on the assets and liabilities of a closing business. For example, stock is normally valued at cost price but if business were about to close have trading because it will be more relevant to use resale value of stock.Impact of Going Concern Concept on Users of AccountsGoing concern concept impacts the decision making of users of accounts. For example, management may occupy to consider a wide range of factors relating to current and expected profitability, potence sources of replacement financing and so forth while taking decisions.Consistency ConceptThe concept of consistency has been applied because the methods employed in treating certain items such as depreciation withi n the accounting records may be vary from time to time. According to consistency concept, once a business has pertinacious which accounting methods it is going to apply and how it is going to interpret the various rules of accounting, it should be consistent in all matters from course of instruction to form. This is necessary to enable relation of the results of the business from year to year.Impact of Consistency Concept on ProfitIf the consistency concept is not there, a business can hardly change an accounting method to vary the profits. For example, if a business wishes, it may vary the depreciation rates or method of depreciation at and alter the reported profits. Consider the pictures on profit of charging depreciation at 15% this year on 10,000 worth of fixed assets and then charging depreciation at 10% next year on the identical 10,000 worth of fixed assets. This year you would charge 1,500 against profits and next year it would be only 1,000, using the slap-up line method of providing for depreciation.Impact of Consistency Concept on Assets / LiabilitiesIf there is no consistency in the accounting methods, the assets and liabilities reported in different years will not be comparable.Impact of Consistency Concept on Users of AccountsUsers of accounts including investors, management etc. can make more meaningful comparisons of financial performance of the makeup from year to year.Partnership SalariesAll associates have a right to work in and manage the alliance business. The checkmates may make arrangements amongst themselves whereby a partner may be entitled to a requital. Partnership wages includes hire drawn by a partner from the fusion funds for acting in the partnership business. An agreement to pay a partnership net income to a partner for a special project is an internal arrangement. The effect of the arrangement is that the partner receives a fixed part of the profits of the partnership before the remaining part falls to be div ided among the partners in the appropriate proportions. The impact of partnership salary is only on the way the partnerships funds are applied as between the partners. A partner drawing a salary is not an employee and any salary paid to the partner cannot be claimed as a deduction from net profits. Therefore, one can neither treat a partnership salary as a true salary, nor an expense of the partnership, but only as a distribution of partnership profits to the recipient partner.If Appleby suggests that he receives a salary, he will still be a partner and cannot be treated as an employee of a partnership. This implies that the partnership will not be able to claim a deduction for Applebys salary. Similarly, Applebys salary cannot form or increase a partnership loss. In reality, Applebys salary will be a mere allocation or publicity of profits prior to general distribution and will not be taken into account in calculating the net partnership income or loss. Appleby will need to show the amount received as salary as his income on his tax return. The amounts distributed to Appleby will be brought into account in computing his interest in the profits or assets of the partnership. However, the amount paid as salary is still regarded as constituting part of the profits of the partnershipIf Appleby gets a salary of 2,500 per month, profit share of Oakley will reduce from 85915 to 73915 as illustrated belowAsset DepreciationIn general, an asset can be depreciated if it meets ALL of the following requirementsThe asset is used in a merchandise or business or held for the production of income as an investment property.The asset has a finite period of usefulness in the business that can be estimated and is longer than one year.The asset is susceptible to wear and tear, pictorial deterioration through interaction of the elements, or technical obsolescence.GAAP specifically excludes shoot down from computation of depreciation. filth normally has indefinite economic bi ography and it does not decline in economic value as a consequence of wear and tear, natural deterioration through interaction of the elements, or technical obsolescence. Therefore, it fails to satisfy the second and the third conditions for an asset to be depreciated.Land is probably the most common asset that is not depreciable. However, buildings may be depreciable. Generally, if such is the case then the cost of the land must be separated from the cost of the building for depreciation purposes. In the scenario under discussion, land and buildings are assumed to imply land and therefore not depreciable.ReferencesReporting Financial Performance, Available from http//www.frc.org.uk/asb/technical/standards/pub0102.html, Accessed 20 November, 2006International Financial Reporting Standards, Available from http//en.wikipedia.org/wiki/International_Financial_Reporting_Standards, Accessed 20 November, 2006Accounting Concepts and Conventions, Available from http//www.accountingweb.co.uk/ cgi-bin/item.cgi?id=69109, Accessed 22 November, 2006ANNEXURE AAssumptions and work Notes for Task 1-2-3Assumptions1. As the scenario merely states that overheads are apportioned between the pulverization and the administration/other sections and does not specify a share (except in the case of insurance), following share of overheads is assumedRent factory 1/3 administration etc.2/3Light and heat Factory 1/2, administration etc. Insurance Factory 1/4, administration etc. 3/4 (given)2. It is assumed that the accumulated depreciation figures in the outpouring balance are before taking into account the current years depreciation.Working NotesCost of Raw Material Consumed = Opening broth of Raw Material + Purchases of Raw Material Closing stock of raw material=12800 +274500 -8500Depreciation on Plant MachineryPlant Machinery at Cost Price= 31000Accumulated Depreciation=18100Written down value as on 31 December 2003= 31000-18100=12900Depreciation = 15% on pen down value= 15% of 12900= 1935Depreciation on furniture and FixturesFurniture and Fixtures at Cost Price= 34700Depreciation = 10% on straight line basis= 10% of 34700= 3470Depreciation on labor VehiclesMotor Vehicles at Cost Price= 28800Accumulated Depreciation=12600Written down value as on 31 December 2003= 28800-12600=16200Depreciation = 15% on written down value= 20% of 16200= 3240There is a 10% mark-up on manufacturing cost. As finished goods are valued at factory cost price with no adjustment for manufacturing profits, the 10% mark-up is taken as a part of the general reserve.Profit share and drawings are held through current accounts. Therefore, an adjusted current account is prepared.Finished goods have been adjusted for the damaged goods.Page 1 of 6Dr. Archana Raheja