SECTION

1
1.1
1.1.1

LEGAL AND REGULARTORY FRAMEWORK

Influence on production of financial statement

It has been the custom to draft different kinds of financial statements for different purpose due to the influences from different party. Hence, the preparation of the final account should be comply with the regulation in the accounting standard. Influence from other party is not only bringing benefits to the company itself but also at the same does give impact to the organization indirectly. Government legislation

Government have played an important role in influencing companys financial statements. It makes use both monetary policy (interest rates and credit controls) and fiscal policy (taxation and public expenditure) whereby it must be shown when a firm produce the companys final account annually. For example,

Profit are taxed thus it will reduce the amount available for reinvestment in the business or for distribution to shareholders. Cost of production will increase if supplies of goods and services are taxes. Supply of labour can be affected because high taxation can act as disincentive to work for low paid who may be better off on unemployment benefits, whilst in work may not be motivated by overtime or bonuses. VAT (Value added tax) is legal requirement that was imposes to all firm at each stage in the production and distribution of goods and services.

1.1.2

Accounting Standard Board (ASB)

Accounting standards board (formally known as Accounting Standard Committee) was formed by the accounting bodies has issued a series of accounting standard called Statement of Accounting Practice (SSAPs) and financial Reporting Standard (FRSs). Both or the accounting standards are compulsory which has been enforce by the company law that should be apply by every entities business preparing financial statement. Anyone preparing financial statements which are intended to show a true and fair view of financial positions of the organization must observe the rules laid down in the accounting standards.

1.1.3 User Groups

There are vast numbers of parties interested in analyzing financial statements including owners/ shareholders, management, suppliers, customers, financial institutions, employees etc. Yet in many aspects of financial statement, they will be interested in different things. Nevertheless, it is possible to conduct a series of ratio from the final account that together will provide all of them with something that will find relevant and from which they can investigate further if necessary. Ratio analysis is a first step in assessing an entity. It removes some of the mystique surrounding the financial statements and makes it easier to pinpoint items, which it would be interesting to investigate further if necessary.

1.1.4

Auditors Company Policy

Auditing provides many economic benefits to society. Auditor including external auditors, government auditors and internal auditors assist companies in improving operations and internal controls. They often make suggestions to management that operations and internal controls. They often make suggestions to management that ultimately reduce costs by promoting operational efficiency and reducing errors and fraud. One of the audits that will be conducts by the auditors is Financial Statement Audits. An audit of financial statement is to determine whether the overall financial statements (the information being verified) are stated in accordance with specified criteria. Normally, the criteria are the principles set out in the accounting standards. Audits are conducted on financial statement using basis or other appropriate basis of accounting for the organization. Financial statements commonly include balance sheet, profit and loss account and cash flow statement including accompanying notes to the financial statements.

1.1.5

Accounting Policies

Users of financial statement issued by organizations want to analyze and evaluate the figures contained within them. They cannot do this effectively unless they know which accounting policies have been use when preparing such statements. Accounting standard such as Financial Reporting standard that replace Statement of Standard Accounting Practice (SSAP) focuses on accounting policies and considers the estimation techniques used in implementing them. Accounting Policies are defines in FRS 18 as those principles, bases, conventions, rules and practices applied by an entity that specify how the effects of transactions and other events are to be reflected in its financial statements through: Recognising Selecting measurement basis for Presenting assets, liabilities, gains, losses and changes to shareholder fund. In other words, accounting policies defines the processes whereby transactions and other events are reflected in the financial statements. When selecting an accounting policy, there are objectives: Relevance Reliability Comparability Understand ability

1.2 USERS OF FINANCIAL STATEMENTS

A measure of performance in an organisation is essentially a quantitative statement which is used to evaluate progress and to assist management in decision making. Owners or managers must know what is going if they are to be in a position to take action to ensure that objectives of the company are achieves. Such information may also attract other users interests who wish to assess performance. Interest groups that use financial statements to fulfill own basic information is classified according to their need.

1.2.1 Owners/ shareholders

A shareholder or stockholder or owner is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. A companys shareholders collectively own that company. The shareholder/ owner of the company both existing and potential will want to know how effectively

the directors are performing their stewardship functions. They will use the financial statements as a base for decisions to dispose of some of their entire share or to buy some.

1.2.2 Management
The most frequent users of the financial data are the managers of the business enterprise. Their day to day activities and strategies are usually based on update financial information taken from the accounting records. Apart from the year end financial statements, they also need interim information on shorter time either quarterly or monthly period. All the financial statement and internal reports serve as managements feedback tools and at the same time aid the managers in making decisions as to what future actions to take.

1.2.3 Suppliers
Suppliers or trade creditors also wants to know whether his present or prospective customer is capable of settling his financial obligations within short period of time. The creditor must be aware of the sign that may indicate a particular customer in having certain financial difficulties if there is enough margin of safety in case the business operations of that customer suddenly were interrupted. Supplier observes carefully their customer financial statements in order to plan their product delivery and to review own financing needs, product design and other marketing strategies.

1.2.4 Customers
The major customer of the enterprise are interested to now whether their supplier is able of continuously supplying their needs for raw material, spare part, services and technological information. A customer with a long range involvement with a supplier makes business plan and decisions that are coordinated with his suppliers plan and decisions.

1.2.5 Financial institutions

Financial institutions such as banks and other lenders provide the short term and long term financial needs of the borrower. A lender needs information that will help in assessing the safety of his investment or the risk involved in his lending exposure. He must know whether the principle amount loan out plus the corresponding interests that would accrue on such loan can be collected from the borrower before they become due. He must also be aware of what other means of protection in case the borrower becomes bankrupt.

1.2.6 Government
The government wants to know how the business enterprise is contributing to the needs of the community and to the economy as a whole. As a regulator, they needs to know if the activities of the enterprise both operational and non operational are within the scope of the authorized business objectives and other legal limits. Its must also be aware if the correct amount of taxes is paid by the enterprise and if the required financial reports are submitted on time to the proper authorities.

1.2.7 Employees
This group needs to know how stable and profitable its employer is. It has been observes that employees make their major family plans and decisions based on the stability and continuity of the operations of their employer. The labour unions study the financial statements of the employer before they make demands related to salary increases, present post employment benefits and other privileges that due the unions members.

1.2.8 Potential Investor 3

The investors provide the capitalization needed by the business enterprise. As a result, they are usually exposed to higher risks compared with the other interest group. The data in the financial statements of the investor help both the present and future investor in assessing the profitability of the business enterprise and in determining whether to expect satisfactory return on their investment. The financial information made available to the investors could help them decide whether they should buy, hold or sell their investment in the business enterprise.

1.2.9 General Public

The other external data users such as external auditor, researchers, students, community, leaders, business organization, stock exchanges and prospective suppliers need financial data related to the operations of the business for varied reasons. Although certain information may be solicited by the data user directly from the business enterprise, most of them get the needed information from the financial statements or from the files of the Securities and Exchange Commission.

1.3

Legislation and regulations

As business activities have become increasingly, global in scope, the desirability of establishing a commonly accepted set of international accounting standards has become increasingly evident. Differences in both economic and legal systems among countries have resulted in different approaches to business and to the financial reporting of business activities. In virtually every county in the free world however, there exists at least some degree of regulation of financial accounting and reporting by government regulatory bodies, professional societies of private standard setting organisation. This section is intended to present to present a brief overview of the establishment of international financial reporting standards.

1.3.1 Companies Acts 1985 and 1989

The Companies Acts are the descendants of modern limited liability company legislation which can be traced back to the passing of the Company Act 1962. This Act was a triumph for the development of the limited liability principle which had been severely restricted since the Bubble Act of 1720, which was introduces to address a multitude of spectacular frauds perpetrated behind the cloak of limited liability. The 1985 and 1989 Companies Acts lay down detailed rules of the format of the financial statements of limited companies. The Companies Acts also cover companies with unlimited liability of which there are very few. a) Separate legal entity

The outstanding features of a limited company are that no matter how many individuals have bought shares, it is still treated as dealing with the outside parties; it is said to be a separate legal entity. The identity of the shareholder in a large company may change daily as shares are bought and sold by different people but it has no immediate impact upon the existence or nature of the company. On the other hand, a small private company may have the same shareholders from the day it is incorporated. b) Memorandum and Articles of Association Each company is government by two documents known as the Memorandum of Association and Articles of Association, generally referred as the memorandum and the articles. The memorandum consists of five clauses for private company and six for public companies containing the following details: The name of the company The part where the registered office will be situated The objects of the company A statement (if a limited liability company) that the liability of its members is limited Details of the share capital which the company is authorised to issue

 A public limited company will also have a clause stating that the company is public limited company. a) Limited Liability The principle of limited liability underlying clauses 4 has been of utmost important in industry and commerce. The investor or shareholder in a limited company is someone who owns shares in the company. The most she or he can lose is the money paid for the share. Even though they are only partly paid, but they are also liable for the unpaid part. Public companies whose shares are trade on stock exchange, share can be sold easily whenever a shareholder wishes. Selling shares in a private company is normally for more difficult. b) Classes of shares The main types or classes of shares are ordinary share and preference shares. c) Distributable profits

In the Company Acts, there is a definition of realised profits and realised losses. A companys realised profits and losses are defined as those profits and losses which are treated as realised in the financial statements accordance with principles generally accepted with the respect to the determination of realised profits and losses for accounting purposes at the time when those accounts are prepared.

1.3.2 Statement of Standard Accounting Practice (SSAP)

To ensure consistency in the way accounts are prepared, the Accounting Standards Committee (ASC) was set up in 1969 by the professional bodies involved. ASC was replaced in 1990 by an independent Accounting Standards Board. It issues Statements of Standard Accounting Practice (SSAP) on which the keeping of financial records is based, so that they are represent a true and fair view. The published accounts of a company must be by complying with these concepts which are summarized as below. Going concern A balance Sheet is prepared on the basis that a business will continue to operate in the future. Accrual of realisation The profit and loss account must take account of any understanding debts which have not yet been paid and payments received which do not appertain to the current financial year. Transactions must be recorded for the trading period to which they relate and not in the period to which they can relate and not in the period where the money is paid or received. Consistency Methods used must be consistent to enable accounts to be compared both over a period of time and between other organisation Prudence or conservation Accounts should be reflecting the least favourable position in a business. for example, projected income should not be overestimated while anticipated expenditure should take like maximum. Separate business entity A set of accounts should always be treated from the business viewpoint and not from the owners, regardless of the legal entity. In limited company, the business is a separate legal entity but with sole traders and partnership there is possible confusion between personal and business finances. Money measurement All accounts are shown in money term and include only aspects of the business which can be expressed in this way.

Stability of Cost Assets in the balance sheets are valued at their cost price Verification All statements in the accounts should be based on verifiable evidence and can be proves to be true.

1.3.3 Financial Reporting standards (FRSs)

The conceptual frame work for financial accounting and reporting is intended to be a collection of fundamental concepts on which accounting and reporting standards are based. It is supposed to contribute order and discipline to the standard setting process and to reduce or eliminate inconsistencies among accounting standards. The establishment of Financial Reporting Standard Board (FASB) commented operations committed to the development of a conceptual framework. FASB did succeed in publishing what has turned out to be at least the foundation of an acceptable framework. As defined by the FASB, the three primary objectives of financial reporting are: Financial Reporting should provide information that is useful to present the potential investors and credit and similar decisions. The information should be comprehensible to those who have reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. It should provides information to help present the potential investors and creditors and other users in assessing the amount, timing and uncertainty of prospective cash receipt from dividends or interest and proceeds from the sale, redemption or maturity of securities or loans. Since investors and creditors cash flows are related to enterprise cash flows, financial reporting should provide information to help investors, creditors and other asses the amounts, timing and uncertainty of prospective net cash flows to the related enterprise. Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources(obligations of the enterprise transfer resources to other entities and owner equity), and the effects of transactions, events and circumstances that change its resources and claim to those resources. The Financial Accounting Standard Board (FASB) The FASB is one part of tripartite structure formed in 1973 to establish financial accounting standards. This structure is intended to encourage involvement in the standard setting process by a number interested organization in addition to the accounting profession. FASB act to Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability and on the qualities of comparability and consistency Keep standards current to reflect changes in methods of doing business and changes in the economic environment. Consider promptly any significant areas of deficiency in financial reporting that might be improve through the standard setting process. Promote the international comparability of accounting standards concurrent with improving the quality of financial reporting. Improving the common understanding the nature and purposes of information contained in financial reports.