The objective of financial reporting is to track, analyse and report your business income. The purpose of these reports is to examine resource usage, cash flow, business performance and the financial health of the business. This helps you and your investors make informed decisions about how to manage the business.

Equity

Recognition of the elements of financial statements Based on these general criteria: An asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. [F 4.44]

Statements of Financial Accounting Concepts (SOFACs) establish a conceptual framework for accounting which includes the objectives and concepts used in developing standards of financial accounting and reporting.

Which definition best describes financial accounting? Measuring a company’s business activities and communicating those measurements to external parties. Financial accounting provides information primarily to: Investors and creditors.

The new basic definition of faithful representation is the “correspondence or agreement between the accounting measures or descriptions in financial reports and the economic phenomena they purport to represent.” (

There are three characteristics of faithful representation: 1. Completeness (adequate or full disclosure of all necessary information), 2. Neutrality (fairness and freedom from bias), and 3. Free from error (no inaccuracies and omissions).

Faithful representation is the concept that financial statements be produced that accurately reflect the condition of a business. For example, if a company reports in its balance sheet that it had $1,200,000 of accounts receivable as of the end of June, then that amount should indeed have been present on that date.

Faithful representation is a fundamental attribute required of financial reports which makes them economic decision-useful. Good financial reports aid informed economic decisions which enhance efficiency in the allocation of resources.

Simply put, fair presentation is the end result that is expected to be achieved by maintaining principle qualitative characteristics and the application of accounting standards. Faithful presentation is one of the qualitative factor that enhances one of the four principle qualitative characteristics i.e. reliability.

Relevance refers to the property of information being capable of making a difference in decisions made by users of that information. Faithful representation refers to an information’s ability to represent underlying economic phenomena faithfully.

Comparability, verifiability, timeliness and understandability are identified as enhancing qualitative characteristics. They increase the usefulness of information that is relevant and faithfully represented.

characteristics are the attributes that make the information provided in financial reports useful to users. As figure 1 shows, the four principal qualitative characteristics are understandability, relevance, reliability and comparability (IASB, 2006).

• Understandability.
• Relevance.
• Consistency.
• Comparability.
• Reliability.
• Objectivity.

The fundamental qualitative characteristics: Relevance – financial information is regarded as relevant if it is capable of influencing the decisions of users. Faithful representation – this means that financial information must be complete, neutral and free from error.

The Conceptual Framework (2010) identifies relevance and faithful representation as the two fundamental qualitative characteristics which make financial information useful. Financial information is relevant if it would potentially affect or make a difference in a user’s decision.

Qualities of an Ideal Financial Statement

• Simplicity. It is necessary to have simplicity in financial statements.
• Relevance. In the financial statements, the information that reveals the purpose of the institution should be presented.
• Comparability. Financial statements should be of comparative study.
• Understandability.
• Completeness.
• Accuracy.
• Promptness.
• Reliability.

Financial statements are important because they contain significant information about a company’s financial health. Financial statements help companies make informed decisions since they highlight which areas of the company provide the best ROI (return on investment).

The three financial statements that are most commonly used to make a business decision are the Balance Sheet, the Profit and Loss account (also known as a “P&L” or “Income Statement”), and the Cash Flow statement. Each has a very specific purpose and will give you an insight into a different part of the business.

Characteristics of Useful Information

• Completeness. Information should be complete in sense.
• Cost-effective. It is one of the important features of information.
• Accuracy. Information collected should be reliable & correct.
• Relevance. Information should be relevant to the problem for which it is collected.
• Easily understood.
• Timely.

Financial information is data about the monetary transactions of a person or business. This information is use to derive estimates of credit risk by creditors and lenders.

They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.

Examples of internal users are owners, managers, and employees. External users are people outside the business entity (organization) who use accounting information. Examples of external users are suppliers, banks, customers, investors, potential investors, and tax authorities.

Financial information can be found on the company’s web page in Investor Relations where Securities and Exchange Commission (SEC) and other company reports are often kept. The SEC has financial filings electronically available beginning in 1993/1994 free on their website.

This would be helpful but by itself it would not provide all the financial information necessary to make the judgment. In fact, to effectively evaluate the financial performance of the business requires financial information from three sources: a balance sheet, an income statement and a cash flow statement.

The three primary sources of assets are (1) investments by owners (issue of stock), (2) borrowing from creditors, and (3) earnings activities.

For example, certificates of deposit (CDs), money market accounts, municipal bonds and Treasury Inflation-Protected Securities (TIPS) are among the safest types of investments. Certificates of deposit involve giving money to a bank that then returns it with interest after a certain period of time.

There’s no minimum to get started investing, however you likely need at least $200 — $1,000 to really get started right. If you’re starting with less than $1,000, it’s fine to buy just one stock and add more positions over time.

asset source transaction. Transaction that increases an asset and a claim on assets; three types of asset source transactions are acquisitions from owners (equity), borrowings from creditors (liabilities), or earnings from operations (revenues).