Financial Statements Essay Example | Topics and Well Written Essays - 1000 words - 2

Financial Statements - Essay ExampleYet, as much as they try to be absolutely accurate, the American Institute of Accountants has said, They (financial statements) reflect a combination of recorded facts and accounting conventions and personal judgments and judgments and conventions applied affect them materi altogethery (cited in Yamamoto 2000 ch5). It is the job of the accountant to go for sound personal judgment to quantify a companys finances to assure they are accurate and truthful.To understand the importance of the financial statement its necessary to meditate the information it contains and how it is utilized. Many people view financial statements as a picture of absolute financial accuracy. They do contain statements on sales, expenses, assets, and liabilities. The numbers all match and balance. However, according to Hooke, ... a bonny number of accounts rely heavily on the enlightened judgment of management and the corporate auditor (Hooke 1998 p.153). The accountant ass ures that these educated judgments are a fair representation of the companys financial status.When a financial statement is read, there are assumptions made that help to accurately interpret the numbers. By the use of conventions, statements are standardized to assure that they will present an accurate view of the business. One convention is that asset note value is based on the current value. No account would be taken due to changing prices over time. Equipment would be depreciated against its original cost, not the replacement cost. Another common convention is that proceedings are recorded when they are completed, not when the money changes hands. Sales can be recorded even though payment may not be due for several months. The accountants personal judgment that adheres to the concepts and conventions of accounting can help assure that the financial statement will present a true and fair view of a businesss activities. The financial statement is made up of several key component s. They usually include a balance sheet, a profit and want account, a cash flow statement, and an equity statement. They will also include complex explanatory notes and disclaimers, which serve to clarify the accuracy of the numbers. Taken together, these items form the consequence of the financial statement.The balance sheet in its simplest form is a statement of the assets a firm owns and who finances their ownership. It is a balance of assets and liabilities. Assets are the aggregate value of land, buildings, vehicles, equipment, and debtors. Liabilities are what the firm is liable for. Liabilities include loans, debt, and shareholder equity. Though the balance sheet indicates the value to the business assets and the full extent of ownership and funding, it should not be entangled with a valuation statement (Tiffin 2004 p.198).There are several conventions for formatting a balance sheet, though the IASB has made some attempt at harmonizing them. In the UK, the generally accept ed layout is the published accounts format. It contains fixed assets such as land and buildings and the intangible assets of goodwill. It also shows the total amount of investment assets. The liabilities are broken exhaust into capital, profit or loss, and creditors. To this point the financial statement is little more than common bookkeeping. A firm records it income and records and classifies its expenses. Yet, this simplistic approach does not serve the