Financial Accounting. Relevance and Reliability Dissertation

Financial Accounting. Relevance and Reliability - Dissertation Example Financial information of any company is presented in financial statements. Financial statements are the main components of company’s annual report. These statements need to have fairly representation of the financial details which is responsible for the decision making process of the investors, suppliers, creditors etc. relevance and reliability are two most important characteristics of financial statements of any organizations. These two factors determine the quality of financial statements. The main purpose of the financial reporting is to provide fairly valued and audited financial details of company for its stakeholders. According to these settlements the actual; worth, performance, profitability, growth rate etc are determined. So, a financial statements needs to be relevant to the valuable decision making requirements of the users. Depending on financial statements, millions are invested to companies by the investor daily. So, relevance and reliability of financial state ments are very essential to the users of financial statements. Purpose of the financial reporting There are two broad purpose of financial reporting, external and internal. External purpose includes the investment decision making by the shareholders and potential new investors of a company, credit rating analysis of company by the credit rating agencies and also by the creditors like banks and other financial institutions, suppliers, government and regulatory bodies like taxation department of government. Internal purpose of financial reporting is to make a standardized record of the financial activities by a company so that it can evaluate its performance at the end of a quarter or a financial year. From the evaluation of the financial statements the companies make decision and develop strategies or change strategies and activities for the next quarter or the next financial year. Financial reporting provides information to the investors, creditors, suppliers so that they can assess the timing, amount and uncertainty of a business entity’s performance in terms of future cash inflow and cash outflow. The elements in financial statements are very important to analysis the ability to generate net cash inflow by a business. This is one of the important characteristics of a business which directly influence the return on the investment of the existing investors of a business and it is also the key important factor to the potential investors by which they are generally influenced to invest in company. Financial reporting is the important part of the valid contract between a stakeholder and an organization. The stakeholder may be any individual or other institutions who are directly or indirectly related to a business entity. A financial report must needs to accomplish some key important factors or characteristics of a business. The main factor is the business is making profit and loss and the amount of profit or loss. Secondly, how much assets the company has to cover its liability and the quality of the assets the company. Third, financial statements provide information about the source of the capital that the business use and efficiency of the business in terms of effective use of the capital so that it can generate substantial return of capital used. Net cash flow of a business is directly influence the return for the investors of a business so it is another important factor of a business which financial stateme