Advanced Financial Accounting Essay

Published under category: Sample Essays | 2014-09-29 20:49:10 UTC

Context: Business and Finance

Advanced Financial Accounting Essay 1. The two main qualitative characteristics that financial information should possess have been identified as relevance and reliability. Is one more important than the other, or are they equally important? All financial reports, including General Purpose Financial Reports contain information useful to all parties related to the particular organization. There are several parties that have the right to access financial information of a company. Since the financial position of the company affects the parties in question, the employees, management team, investors, creditors, and even suppliers may require financial information in order to chart their way in their business relationship with the company (Collier 2003, p.53). Consequently, financial information should exhibit some specific qualities that optimize its usefulness to the relevant parties. Relevance and reliability are some of the most critical qualities of financial information. The two aspects of financial information are considered primary qualities. Since the two qualities affect an organization in different ways, they also affect each other when different levels of importance are attached to them. Reliable financial information creates an accurate picture of the financial position of a particular organization. All transactions are reflected in the information faithfully without any kind of alteration. Thus, the information presented must be free of bias (Deegan 2010, p.67). In addition, the information should not be intended to impress any of the parties that examine it. This way, the parties that use this information are able to utilize it productively. If the financial information presented does not represent the true financial position of a company, the user might make inappropriate decisions with possible dire consequences. This does not conform to the notion of true reliability. Reliability is critical for any financial information since lack of faithfulness in the information renders it ineffective in all areas of application. Once the information fails to reflect the true financial position of a company, it cannot be used by any of the parties who require the knowledge of a company’s performance. Use of biased information poses a threat to the entity using it, and it is almost certain to culminate in a financial loss or ineffective operation in a business (Roberts 2004, p.93). Relevance of financial information refers to the ability of the information in question to influence the process of decision making by any concerned entity (Deegan 2010, p.59). This means that the state of the information affects the nature of the decision made. Accurate information is the most apt for decision making in any business organization. Presence of relevant financial information should make a significant difference in the decision made by the concerned party. When relevant information is utilized in a decision making process, it should exhibit a predictive aspect whereby the course of action in future events in an organization can be determined. This is a fundamental aspect of relevant financial information since most decisions affect future events in a particular business entity. The ability to determine the future course of the organization's events is called predictive value of financial information (Flegm 2000, p.42). In addition to the predictive value, one should be able to determine possible decisions in future events. This means that there should be a way of obtaining feedback to ascertain the impact of the information on the future events. A comparison between the expected result and the real outcome can be used to gauge the usefulness of financial information. The degree of relevance of information depends on the context within which it is utilized. Particular information may not be relevant in one field, but may be critical in another. Thus, if the financial information is reliable, it is likely that it is relevant in a particular field. However, this information may not be relevant to all the parties that are entitled to using it for planning. Either the information is completely irrelevant in the line of operation of some entities, or the business situation at that particular moment does not favor its use (Kimmel & Kieso 2010, p.40). In other words, relevance of financial information depends on the number of entities that find it useful in their operations, and the degree of its importance. Information that is relevant to a business enterprise at a particular moment is said to be material. This means that it meets the minimum requirements for it to be useful to the specific business entity. Alternatively, materiality is defined by the lowest limit of usefulness of the particular information (Deegan 2010, p.61). Both reliability and relevance of financial information is important for business entities. Absence of one of the two qualities leads to a change in the business environment. However, the degree of importance of the two qualities varies. Relevance of financial information depends on the entity using the information. Thus, lack of relevance in one field does not nullify relevance in other fields. On the other hand, if financial information is unreliable, it cannot be used by any business entity. This is because the information is likely to mislead the user into making inappropriate decisions (Kimmel & Kieso 2010, p.36). For this reason, reliability is more important than relevance for any financial information. There are several approaches to the regulation of the market. In a true free market, economic factors and market forces are allowed to govern the nature and scale of all transactions. In a society were values differ among communities and individuals, the need for regulation of the market to protect public interest is of cardinal importance. In this regard, regulatory bodies formed by the authorities regulate the market by setting rules to be followed and limits to be observed. In addition, the regulators use financial policies to govern the market (Balleisen & Moss 2010, p.30). However, it is debatable whether the measures used by the regulators are in the best interest of the public or not. The regulators take care of the inadequacies of the free market forces. They are considered third parties in the market. It is possible that regulators act in their own interest rather than in that of the public. Financial reports submitted to the regulator by business enterprises determine the amount of tariffs and taxes that are charged on specific business transactions. This amounts to regulation by the social and political forces on which the regulators depend on (Brunnermeier & Crockett 2009, p.84). In this essence, all the parties involved in the market obey the economic theory, which postulates that all players in the market have some interest in the transactions. Since the regulators seek to control the opinion of the public and the influence of the business entities, it is likely that they will introduce measures that favor both entities. It is not possible for the regulators to introduce a measure that is in the interest of the public, but works against the regulating body (Bozeman 2007, p.22). Thus, if a measure is to be introduced by the regulator to control the trend of the market in favor of the public, it has to be in the interest of the regulating body itself. This is a simple observation relying on economic theories. It is a plausible assumption that the regulators and the public share the same interest. For the market, public, and the regulators to exist in harmony, there must be a balance in the economic system. This means that the regulators will always act to keep the system in equilibrium, avoiding any degenerative tendency in the market (Bozeman 2007, p.18). It is obviously the interest of the public to have a stable market, and thus a stable economic system. In addition, it is important to the regulators that the economic system remains stable to ensure the survival of the regulatory body. Thus, the interest of the public and that of the regulators are bound together. The ideal purpose of the regulators is to act as to ensure the well-being of the whole economy in the short term and in the long term. This theory requires that the regulators remain neutral, and should not favor the public or the industry, but must enforce measures that are good for the economy even in the long term. For this to be realized, the regulators should not rely on public support since the benefits associated with this do not last long (Balleisen & Moss 2010, p.34). On the other hand, relying solely on corporate opinion to formulate regulations may have short term benefits associated with this support. However, too much dependence on either side results in instability of the system in which the three parties co-exist. Therefore, the regulator will change policy depending on the degree of influence that is wielded by either the public or the corporate entities. Evidently, the regulator cannot fully support the public or the industry unconditionally. Political considerations have to be made such that the regulator survives in the political and economic conditions prevailing at the particular moment. Decisions made by the regulator either favor the public, the corporate sector, or both. However, these decisions must always be in the interest of the regulator. It is unrealistic to assume that the regulator acts on demand of the public. Some experts believe that the regulator should always let the public have its way in the decisions concerning the economy (Brunnermeier & Crockett 2009, p.81). This theory puts the public above the industry, and assumes that the regulator and the industry are all subject to control by the public. In this case, the well-being of the public is of supreme importance. This is an ideal opinion since the well-being of the public means that the industry must also make significant progress in its endeavors. A regulator is introduced to ensure this situation is achieved. Once the regulator is formed, its effort towards survival leads to formulation of policies that favor the regulating body. It is therefore logical to conclude that the regulator always acts in its own favor. Its interest is above that of the public and the industry in all actions. 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