Abstract
Financial statements serve a crucial purpose in any business setup or organization considering the fact they indicate the financial abilities and situation of an organization. In addition, an organization or government can confirm its performance and know the necessary steps to undertake to keep up with the trend or improve it.
Further financial statements allow companies to compare their performance with others hence assisting them in formulating and implementing their strategies to become competitive and productive. In the government sector, various sectors of the economy can be compared and the non-performing ones improved to avoid dragging the economy behind.
More so, the effective strategies of good performing sectors can be applied in the other sectors and economy as a whole. The financial statements assist the governments and organizations in planning as they are aware of the exact income as well as expense hence no guesswork rather they can make well-informed decisions and set achievable future goals without major setbacks.
However, financial statements have their demerits in any government as they may mislead them especially when they are poorly prepared, calculated, and interpreted. The availability of unreliable and non-valid data will consequently give wrong financial statements outcome that may be suicidal when their interpretation is applied in making decisions and planning as the organization would not making its decisions based on the actual current situation hence there is a probability of over or underestimation in funds allocation and minimization of expenses.
Therefore, great care needs to be taken when using financial statements results to avoid losses and poor performance. Hence, the paper intends to carry out detailed research to determine the merits and the demerits of the financial accounts in the United Kingdom in terms of their importance, uses, and problems associated with them
Introduction
Financial statements refer to the official report of the organization’s financial operations. They are usually called financial accounts in the United Kingdom. They normally give an overall of a company’s financial situation for a given period. These financial accounts include the following: the balance sheet that usually offers accounts of the financial situation or state by indicating a company’s asset, liabilities, and net profits for a given period and spot. Income statements account for an organization’s total revenue, expenses, and earnings for a particular time duration.
Thirdly, the account of retained earnings gives details on the variations in an organization’s drawn back profits for a particular time duration. Lastly, the statement of money flows that offers details on an organization’s liquidity flow undertakings, especially when carrying out its operation, saving, and monetary undertakings. These financial statements become more complicated depending on the size of a firm where preparations of these accounts in large organizations incorporate a broad number of reports attached to these accounts and administration dialogues and examinations.
The small reports usually give details of every entry on the four financial statements to assist them in understanding their constituents and easier interpretations of the accounts for applications. This assists the management and the users of the financial information of these accounts considering that large organizations involve a lot of entries in their accounts requiring further clarifications compared to small companies financial statements that are easier to understand and interpret as the number of items entered in their accounts is few and simple to understand to users as well as the managers. These financial statements are meant to assist in the planning and formulation of decisions hence the need to be more detailed and exact to avoid losses.
Strengths of the financial statements in the United Kingdom
Financial statements are prepared under some laid down rules called Generally Accepted Accounting Principles (GAAP) in the UK to ensure they meet certain quality standards and conditions to avoid wrong results or outcomes based on the wrong data In their preparations. These rules protect the users of the information such as the state, companies, investors, etc from the auditors or accountants mistakes leading to unintended losses. Hence, preparing the accounts is more accurate and to rely on the correct data rather than guesses thereby the risk of using the results.
Financial reports are compulsorily required by law and they are usually prepared at the described time mostly 12 months. They are subject to external audits to verify that the results are correct and no bias on items value included on the accounts to assure the external users of the information is useful. In the UK, all the organizations are required legally to prepare their accounts yearly and they must be audited to verify the validity of the information to avoid misleading the users.
Because the financial reports indicate the financial situation of an organization or economy than the administration to make future decisions on the way forward and how to improve their performance to become more competitive and productive in their markets. Lack of these reports would make uninformed decisions that would to losses and poor performance. Therefore, in the UK the financial statements are very helpful to the managers in improving the firm’s performance. The government sectors also prepare their budgets that indicate their expected sources of income to meet their annual expenditures. The government’s reports are more detailed and complex as their operations are numerous and extensive and indicative of the fiscal and monetary policies.
An organization can compare its performance with other companies by using various financial accounts of other companies as they are required to be published in public in the UK especially the companies involved in the stock market to inform and advise the shareholders and interested investors. Hence, one company can employ the strategies and techniques of a well-performing company to improve its performance in the market.
For instance, a company can make use of cost minimization techniques to reduce its costs and expenses to expand on its profits making it more competitive. In addition, the financial accounts are very helpful to the workers as they can evaluate the company’s performance to make their demands concerning their salaries, promotions, and their overall welfare. Therefore, these accounts are useful to the numerous numbers of users that need their information to make well-informed decisions and avoid losses or conflicts.
Financial statements assist potential investors in deciding the corporation to invest in by assessing their performance and their financial situation to avoid making wrong decisions that are costly in terms of losing the money invested. In addition, investors need to apply to companies that are making profits or they are assured of better performance in the future to recover some of their money invested. Very few investors are willing to put their money in companies where the shareholders or owners do not dividends or profits after some time. The only way to avoid this is through using the financial statements of a company for some years to assess the trend of its financial situation and performance to assist in making their investments decisions.
Furthermore, banking institutions and other lending corporations rely on these financial statements to evaluate the credit viability of a company and decide on whether to lend them or not. This is mainly because these institutions can know how well these companies can repay their loans considering their financial status indicated by the financial reports otherwise organizations are required to surrender collateral security as the assurance for repayment. Therefore, financial statements reduce the bank’s losses incurred from lending to non-viable borrowers due to the unavailability of information about their financial status. Therefore, the financial statements strongly assist the money market sector in avoiding complications arising from frauds and unnecessary losses.
The United Kingdom government relies on the financial reports to confirm the correctness and exactness of taxes and other levies acknowledged and paid by various companies. Otherwise, many companies would be evading tax payments by giving wrong financial situation or performance but the fact that financial statements are highly regulated by accounting principles and required by law makes the information accurate and reliable for the government to confirm the exact amount needed to be paid a given organization.
Lack of financial accounts regulations and availability would make companies evade or pay less than the required levies as no information would be available to prove their status. However, the financial statements have assisted in knowing the amount of taxes to be levied on each company without much of a problem.
Similarly, the media houses use the financial statements to write articles or air their financial commentaries to their customers. Without this information, the media houses would find it difficult to write or air educative and informing documentaries that would lead to the loss of their customers as they would be considered irrelevant and misinformed. On the other hand, the whole community utilizes the information to evaluate the companies’ performance and use the overall information for their benefit. For instance, the students can use the materials to learn how financial statements are prepared and interpreted thereby attaining the knowledge and skills of working as an accountant or financial analyst.
Weaknesses of the financial statements
Lack of an efficient internal regulatory and control body in a company to ensure financial statements are prepared under the laid down principles and assure the users of their trustworthiness. These controls avoid or identify the mistakes and deception in items’ value before they influence financial statements. Due to the fact no control arrangements and procedures can eradicate the mistakes, faults, or frauds, companies are advised in the UK to ensure that their financial statements are highly correct and reliable by using relevant data.
This implies that in every financial statement there is a risk that the users take when they as no one knows the degree of accuracy of the statements. In addition, losses incurred by the external users of these materials are never acknowledged in any way and only the user suffers the loss. Therefore, the financial statements can never be 100% accurate and reliable making the users be cautious when using the information.
On the other hand, there are provisions made in the financial statements making them considered to apply estimation in their preparations. These estimates can either be over/under-stated hence they can be used to influence the outcome of the statements in favor of the company. These provisions increase the chances of fraud in the financial statements as they can not be verified with accuracy. Therefore, this problem seems to be affecting the outcome of the statements to ensure companies get favor from their customers and lenders without considering the risk to the users.
Poor monetary procedures and systems that lack coordination in carrying out their operations making the data available for preparing reports unreliable and inaccurate, implying that the findings of the statements are wrong. Though the company may be experiencing profits the results are based on unreliable data. This affects the company as the managers have a wrong perception of their company’s financial situation and performance, consequently affecting their decision-making due to wrong information. In terms of financial losses to the users, a single mistake is disastrous to both the company and the users besides destroying the company’s reputation and image in public as they may be accused of dishonesty and fraud.
The single entry errors of the financial reports stand as one major weakness because these mistakes are difficult to detect in a financial statement. They usually occur instead of making a double-entry i.e. debiting and crediting an item only a single entry is made. However, the financial statement balances without any sign of alarm that an error could have occurred. Hence, unless a reliable control system and procedures are applied to detect this problem it would further be carried in the decision-making bodies despite its weaknesses.
Although financial statements are subject to an external auditor, powerful companies may collude with them to neglect the errors in their financial accounts for money or in other favor especially due to the fear of losing their image to the public at the expense of the external users. This form of corruption is unnoticeable by the UK government to ensure that accuracy is maintained and adhered to by companies. Thereby, causing the rise of risk connected to the use of unreliable and inaccurate information arising from the financial accounts. Sometimes, companies hide their real financial situation from the public by giving the wrong financial statements to benefit from their good image and performance while the users of the information may be left suffering for making misinformed decisions.
In addition, when companies are discovered to have misstated, understated, or overstated their financial statements they end facing some penalties or legal punishments in addition to the harm done on their image hence affecting the attitude of their shareholders and customers towards them. These act as a warning to the companies to avoid errors in their statements due to the penalties. However, this can not be considered as the guarantee of reliable and accurate statements because it is difficult to curb the problem completely. Therefore, the presence of penalties on wrongdoers does not guarantee the security of the users as they are companies that will disobey the rules despite the penalties making the users suffer innocently.
Conclusion
Financial statements normally indicate the financial situation, performance, and wellbeing for a given time. They are very to the managers, government, investors among other users in assisting them to make well-informed decisions through utilizing their information.
Managers know the financial status of their companies through these statements and use the information to decide the way forward as well as compare their performance with other companies. To the banks, they confirm the credit viability of the companies by using the financial statements to decide on how much to lend and to what companies.
On the other hand, the UK government relies on the accounts to determine the amount required to be paid by companies as taxes and other levies to avoid tax evasion. However, the accounts have weaknesses that make them unreliable and inaccurate in some cases for making informed decisions.
For instance, many companies lack an effective control system and procedures to check and spot errors before they extend to other areas. Therefore, the reliability and accuracy of the financial statements are not guaranteed but their regulations ensure they maintain high levels of usefulness to the general public.
References
Andrew Thomas, introduction to financial accounting, London: prentice hall publishers, 2005.
Frank W. and Sheila R. Book-keeping and Accounts, UK: Pearson education publishers, 2004.
Frank W. and Alan S. Business Accounting, Cambridge: Cambridge university press, 2005.
James van H and John W. Fundamentals of Financial Management, London: McGraw-Hill publishers, 2004.
Jones, Dominic. Synthetic Synthesis, Project Finance, London, 2000.
Keegan, Mary. Global Financial Regulation, Accountancy, London, 1999.
Peter A and Eddie L. Financial Accounting for Decision Makers, United Kingdom: Pearson education publishers, 2004.