Financial information

“Financial information is intended to be useful for users.
However its presentation is so complex that it is not understandable to most non- financial users.”

Discuss this statement.

  • User Deleted4 Jan, 2016 – 17:03:01

Understanding financials statements from the interpretation of income statements, balance sheets, cash flow statements and financial footnotes, to communicating with confidence in financial and accounting language should be a part of every manager’s tool kit. Financial statement reporting is all about communicating financial standing with supporting information to current and prospective shareholders and stakeholders. Most stakeholders, including analysts and employees, may be interested in how the organisation is progressing. Some parts of the data might be of interest to all, while other parts will only be of interest to particular groups. The readers that are planning to use the financial statements to make decisions need to be aware that a organisations financial statements do not and cannot provide all the information they need. Due to the financial statements being a historical view and may differ from the current operations. Financial statements are not designed to show the market value of the company but they do provide information to assist shareholders, other providers of capital and other stakeholders in estimating that value.
Financial reports communicate important information about an organisation’s historical financial performance and financial position to its stakeholders. All business owners and investors need to understand financial reports. Such an understanding will help the dissemination of required information, reduce information irregularity and lower an organisation’s cost to access ongoing capital.

Non-financial users should develop a better understanding of financial statements and improve their financial skills in order to make critical business decisions involving corporate performance, financial position, budgets, cost-savings and growth strategies.

  • Christopher

Understanding financials statements from the interpretation of income statements, balance sheets, cash flow statements and financial footnotes, to communicating with confidence in financial and accounting language should be a part of every manager’s tool kit. Financial statement reporting is all about communicating financial standing with supporting information to current and prospective shareholders and stakeholders. Most stakeholders, including analysts and employees, may be interested in how the organisation is progressing. Some parts of the data might be of interest to all, while other parts will only be of interest to particular groups. The readers that are planning to use the financial statements to make decisions need to be aware that a organisations financial statements do not and cannot provide all the information they need. Due to the financial statements being a historical view and may differ from the current operations. Financial statements are not designed to show the market value of the company but they do provide information to assist shareholders, other providers of capital and other stakeholders in estimating that value.
Financial reports communicate important information about an organisation’s historical financial performance and financial position to its stakeholders. All business owners and investors need to understand financial reports. Such an understanding will help the dissemination of required information, reduce information irregularity and lower an organisation’s cost to access ongoing capital.

Non-financial users should develop a better understanding of financial statements and improve their financial skills in order to make critical business decisions involving corporate performance, financial position, budgets, cost-savings and growth strategies.

 

 

 

Jay

Financial information in its many forms is intended to be a source of information for the end user. As capital/finance is the lifeblood of many/all business endeavours information/reports/statements on the status and use of this asset is not only useful for users, it is a required functional output of an organisation. Financial information enables the user to gauge the current financial situation of a given scenario, business activity or snapshot of the business as it stands. This information for managers enables them to make decisions that should positively affect the business as well as identify fiscally problematic areas.

This information and the way it is presented will undoubtedly be complex to most non-financial users. In my experience I am assuming that most non-financial users are non decision makers in the business. In the case that a non-financial is an employee in the business this knowledge and exposure to the financial information will grow as they progress and more experience they have. Managers, decision makers and parties with interests within a business need to know the fiscal ramifications of every decision they make, because in the end of the day, the overall objective of a business is to make money.

Non-Financial users who have interest in investment or starting a business will introduce themselves to financial information naturally as to further their knowledge and skills. While it’s not necessarily hard to pick up the basics it takes attention to detail and experience to be able to identify trends, or opportunities. For those who have no interest and no use for financial information this data will remain complex until the need arises that they will have to learn how to use it.

Financial information is intended for its end user, who have experience with dealing with the numbers and knows how to use it effectively. Like a foreign language, say Chinese, if you do no speak it or have no need to speak it then it will be complex to you. However if you require it for work, or are interested in it you will find the channels and the way to learn it and to understand it so its not complex and you can use it to your benefit.

  • Yvonne

According to Birt et al (2014), p.5, financial information is usually communicated through various reports including income/cash flow statements and balance sheets. If users and in particular managers, don’t understand the information contained in the reports/statements then their decisions relating to operations, investments and finances may negatively impact the organisation.

In my organisation the finance team once presented a set of detailed reports in an all staff meeting, there were many puzzled faces because the reports did not cater to non-financial users. Therefore, financial experts should tailor information to specific audiences using easy to understand language and managers should seek to a gain greater understanding. Contemporary organisations understand that financial information can be utilised by all employees in all parts of the business from developing evidence based strategies, determining current position against business plans and for continuous improvement initiatives, therefore, the way in which it is presented and communicated is critical.

 

 

 

 

 

 

Can you think of any reasons why making the maximum possible profit in the current year may not be in the best interests of the business and those connected to it?

 

  • User Deleted4 Jan, 2016 – 17:16:01

The strategic plan of a business may require it to purchase new equipment to enable growth or be required to assist in diversifying into a new product or territories, this additional set up cost would reduce profit in the short term. In my organisation, a taxi booking service we own no taxis, however we do own some buildings and vehicles along with a very small amount of equipment. I believe that our greatest asset is our combined brand, the processes and knowledge held in human resource that deliver a service. There is a requirement to invest in this knowledge by providing ongoing training. I feel it fits in the following definition of an asset. An asset is formally defined in the Conceptual Framework (para. 4.4(a)) as ‘a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’. The essential characteristics for an asset are:
1. the resource must be controlled by the entity
2. the resource must be as a result of a past event
3. future economic benefits are expected to flow to the entity from the resource. (BIRT et al., 2014, p. 160)
The problem I have is; how do you recognised “Brand” in monetary value on a management or financial report, if this cannot be achieved then is “Brand” an asset? Bertolotti, (1995, p 28) refers to the term intangible assets, and states the 4 main categories of assets are referred to as: 1. intellectual property (IP), 2. brands, 3. publishing rights, and 4. Licenses. Within the same paper it is stated that in 1992 Arthur Andersen completed a major study which concluded that many intangible assets are identifiable, separable and capable of being valued. So the creating of intangible assets could also reduce the maximum possible profit in the current year which may be in the best interests of the business

Reference

Bertolotti, N. (1995) Valuing intellectual property. Managing intellectual Property, 46, pp.28– 32. Available from: .

BIRT, J., CHALMERS, K., MORONEY, S., BROOKS, A. & OLIVER, J. (2014) Accounting business reporting for decision making. Fifth Edit. John Wiley & Sons Australia, Ltd.

  • Christopher

The strategic plan of a business may require it to purchase new equipment to enable growth or be required to assist in diversifing into a new product or territories, this additional set up cost would reduce profit in the short term. In my organisation, a taxi booking service we own no taxis, however we do own some buildings and vehicles along with a very small amount of equipment. I believe that our greatest asset is our combined brand, the processes and knowledge held in human resource that deliver a service. There is a requirement to invest in this knowledge by providing ongoing training. I feel it fits in the following definition of an asset. An asset is formally defined in the Conceptual Framework (para. 4.4(a)) as ‘a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’.

The essential characteristics for an asset are:
1. the resource must be controlled by the entity
2. the resource must be as a result of a past event
3. future economic benefits are expected to flow to the entity from the resource. (BIRT et al., 2014, p. 160)

The problem I have is; how do you recognised “Branding” in monetary value on a management or financial report, if this cannot be achieved then is “Branding” really an asset? Bertolotti, (1995, p 28) refers to the term intangible assets, and states the 4 main categories of assets are referred to as: 1. intellectual property (IP), 2. brands, 3. publishing rights, and 4. Licenses. Within the same paper it is stated that in 1992 Arthur Andersen completed a major study which concluded that many intangible assets are identifiable, separable and capable of being valued. So the creating of intangible assets could also reduce the maximum possible profit in the current year which may be in the best interests of the business

Reference

Bertolotti, N. (1995) Valuing intellectual property. Managing intellectual Property, 46, pp.28– 32. Available from: .

BIRT, J., CHALMERS, K., MORONEY, S., BROOKS, A. & OLIVER, J. (2014) Accounting business reporting for decision making. Fifth Edit. John Wiley & Sons Australia, Ltd.

  • Jay

Christopher you make some very insightful points about your business. It is very interesting that you say that you are a taxi booking service but own no taxis. It seems that one of most profitable business models being around is one that provides a service that connects individuals with a desired product/service. The world’s largest taxi company, Uber, owns no taxis as well as the world’s largest accommodation provider, Airbnb, owns no real estate (apart from offices etc). You state that the most important asset is your combined brand, which I agree as this is what essentially creates the cash flow of the business where customers are drawn to your services which you provide.

  • Jay

There a numerous reasons why maximising profit may not be in the best interest of a business. The cost/expense incurred in the effort of maximising profit could mean drawing resources from other departments or refocusing personal, resources and efforts. In doing this it could mean that the business falls behind against competitors for the coming years, whether that be in marketing initiatives as the business has foregone investment in this area to pursue profit. Furthermore areas like research and development may be impacted as resources are restricted. While being a minor drawback, if cash flows haven’t been forecasted correctly with future activities being considered and clever accounting practices being implemented the tax implications for the following year(s) may have an impact on the short to medium term.

The method of maximising cost could go against the values of the company which may be seen by customers and other interested parties poorly, negatively effecting relationships moving forward. It also can provide a false sense of business value and capability. Making the largest possible profit in one year may provide a false sense of security that sees a business want to expand, however proper thought has not been taken into consideration in how one came to maximise profit. A business may not have the infrastructure or personnel to be capable of expanding effectively.

Ultimately any effort that deviates greatly from the business strategy can impact the business negatively, even if it is in the pursuit of maximising profits. While businesses may always aim to maximise profits it should be done in a way that is sustainable for a significant period of time, rather than have one ad hoc growth period.

As a development manager in the construction industry there is no opportunity for me to maximise profit in a particular year. Profits are calculated at the front end, with the profit margin being an output of the overall project feasibility study for a development. My main objective to manage this profit line ensuring we reach our goals during and at project completion. I do so by ensuring our project program is being met through supervision, forecasting and coordination of construction and developer activities.

  • Yvonne

Maximum profit in the current year does not guarantee a sustainable future for organisations. Many contemporary organisation understand that the market is highly competitive and that customers choose organisations they purchase from wisely. Social and environmental responsibility, quality of products and services, customer service excellence, globalisation, diversity, culture, technology and innovation all play a key part in the success of modern and profitable organisations. According to Brit et all (2014) p. 45 there are nine principles to business sustainability; ethics, governance, transparency, business relationships, financial returns, community involvement/economic development, value of products and services, employment practices and protection of the environment therefore organisations need to continuously invest a portion of profits back into the organisation to remain sustainable.

References
Birt, J, Chalmers, K, Byrne, S, Brooks, A & Oliver, J (2014) Accounting; Business Reporting for Decision Making
Forbes http://www.forbes.com/sites/jeffthomson/2015/12/03/why-cfos-should-embrace-sustainability-for-strategic-growth/#2715e4857a0b4d12ad1d5047

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