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Solved Important Questions Answer – Chapter-2: BBA \ 1st semester | Basics of Corporate Reporting | Financial Accounting

Level: BBA – 1st semester

Subject: Financial Accounting

Chapter: 2 – Basics of Corporate Reporting

BBA Notes 1st semester
BBA Notes 1st semester

1. What do you understand by Annual Report” of a company? Briefly explain the major elements of an Annual Report.

annual-report
annual-report

Ans: An annual report of a business entity is the end product of accounting processes. All types of organizations need to prepare annual reports at the end of their accounting period but the requirement to be fulfilled may be different in organization to organization according to their nature. Annual reports are prepared at the end of each accounting period and normally presented at the time of their annual general meeting (AGM). Annual reports are the summary reports about the financial as well as operational performance of the organization during an accounting period, comparative study with he past performance effects of environment to the performance and set of achievements to be made in the upcoming period. The annual reports have the following components.

  • Financial Statements: The financial statements are major components of the annual report. The components of financial statements are income statement, retained earnings statement, balance sheet, statement of cash flow, statement of changes in shareholders’ equity which provide profitability, financial position and cash flow, the situation under different activities and changes in the value of shareholders’ contribution as capital for the time being respectively.
  • Chairperson’s Report: Chairperson’s report comprises all the aspects of financial results, the composition of the board of directors, and discussion about the external environment, specially the financial situation of the country and the impact to the business as summary and presented by the chairperson of the organization addressing to the shareholders. This also comprises the targets set by the organization for the upcoming periods and greeting to all the role players for their contribution to get the organization to the state.
  • Managerial Responsibility for Financial Reporting: Managements responsibility for financial reporting address dos and don’ts followed by the organization according to standards.
  • Management discussion and analysis: Management discussion and analysis covers all the aspects of the operation during the period and analyzes whether or not targets where achieved. In this, the management team discuss the financial statements and provides vital explanations for the amounts reported in the financial statements. This simplifies the information in reports, provides back-up of the information and also discloses about the plans and strategies of the organization.
  • Financial Summary: Financial summary provides a highlight of the major economic indicators in a graphical way like pie charts, graphs, pictures, bar diagram etc.
  • Notes to financial statements: Notes to financial statements provide significant non quantifiable matter at the bottom of the financial statements to be shown or adopted by organization.
  • Report of an independent auditor: Report of an independent auditor gives the validity, recognition or proves authenticity about the accounting procedures adopted. This is must be signed by an independent auditor recognized by concerned authority.

2. What do you mean by financial statements? Explain the importance of financial statements.

financial statements
financial statements

Ans: Financial Statements

The shareholders and other stakeholders are those who have at least some level of stake over the principal means of communicating important accounting information to the various internal and external users. Accountants report about its stock of resources in the form of a balance sheet and the flows are reported through the income statement, statement of changes in retained earnings and a cash flow statement. Consequently, a business entity prepares and issues four statements, which are generally accompanied by a number of supporting schedules and explanatory materials – all of them compiled in to an annual report. Shareholders and other stakeholders of the business are normally communicated through different components of financial statements.

The major components of financial statements are income statement, statement of retained earnings, balance sheet, statement of cash flow and statement of changes in stockholders’ equity. They are mentioned below.

Income Statement

Income statement reports the result of company operations during a particular period of time. In other words, it depicts the success or failure of a company’s operations. It consists of the incomes with the expenses occurring during a period. The incomes and expenses are finally matched to as certain operating income or loss.

As income statement provides useful information for predicting future income. It is useful for current as well as prospective investors. Likewise creditors use the income statement to predict the company’s profitability to repay the debt on time.

Statement of Retained Earning

Retained earning is the net income retained by the company. In other words, it is the position of net profit which is not distributed as dividend. It shows the changes in retained earning with cause. The following is the format of retained earning statement.

The users of financial statements evaluate the dividend and reserve transfer practices through retained earning statement. The investors prefer to invest in such a company that has a high dividend payout ratio in the past. However, the creditors prefer a low dividend payout ratio since it increases their clients’ ability to pay back the debt on time.

Balance Sheet

It is a statement that reports the assets and claim to the assets on a specific point of time. The claim can be categorize into claim of creditor of owners are called stockholder’s equity.

The analysis of balance sheet is useful for a company mainly due to the following points.

  • Nature of company’s assets and liabilities
  • Relationship between debt and stockholders equity

Statement of Changes in Shareholder’s Equity

The statement of changes in shareholders’ equity shows the changes in equity over reporting period. The owners’ equity changes by two factors as investment by the owner and net income. The investment by the owner and net income increase the owners’ equity whereas the net loss and withdrawals decrease the owners’ equity.

Statement of Cash Flows

A statement that shows the cash receipts and payment (also called inflow and outflow) during a particular period of times is called cash flow statement. It shows the effects on the position of cash under operating, investing and financing activities. A cash flow statement attempts to answer the following questions.

  • Where did cash come from?
  • How was cash used?
  • What was the changes in cash balance?

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3. Describe the role of IFRS (International Financial Reporting Standards) and NAS (Nepal Accounting Standard) for regulation accounting and auditing.

Ans: It is a legal requirement in most jurisdictions that public companies must present their accounts and other financial information according to a standard set of accounting rules. Traditionally, these rules were developed at national level – United States Generally Accepted Accounting Principles (GAAP) is but one example. Globalization of financial markets has meant an increased focus on international standards in accounting and has intensified efforts towards a single set of high quality, globally acceptable set of accounting standards. Financial statements prepared in different countries according to different set of rules, mean numerous national sets of standards, each with its own set of interpretation about a similar transaction, making it difficult to compare, analyze and interpret financial statements across nations.

a. to develop a single set of high quality, understandable, enforceable and globally accepted International Financial Reporting Standards (IFRSs) through its standard – setting body, the IASB;

b. to promote the use and rigorous application of those standards;

c. to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and

d. to bring about convergence of national accounting standards and IFRSs to high quality solutions.

Converging to global accounting standards i.e. IFRS facilitates comparbility between enterprises operating in different jurisdictions. Thus, global accounting standards would remove a frictional element to capital flows and lead to wider and deeper investment in markets. Convergence with IFRS is also in the interest of the industry since compliance with them would be able to create greater confidence in the mind of investors and reduce the cost of raising foreign capital. It is also burdensome and costly for enterprises operating across several countries to comply with a multitude of national accounting standards and convert them to a single standard for group reporting purposes. Convergence would thus help reduce both the cost of capital and cost compliance for industry.

In pursuit of its objectives, the IASB works in close cooperation with stakeholders around the world, including investors, national standard-setters, regulators, auditors, academics, and other who have an interest in the development of high-quality global standards. Progress toward this goal has been steady. All major economies have established time lines to converge with or adopt IFRSs in the near future and more than hundred countries require or permit the use of IFRSs.

Though Nepal Accounting Standards are framed based on standards issued by the IASB, there are certain differences due to the legal and regulatory environment. Since 2007 the Nepal Accounting Board decided that Nepal should converge towards IFRS.

IFRS leads to a situation where companies spend less time and effort complying with international accounting and financial reporting rules, regulators use fewer resources to uphold them and investors make better decisions as a result of them, they will clearly be of benefit. However, the situation as far from perfect, and it is difficult to assess, when the project is only partially complete, whether IFRS is having a positive or negative impact on those it is designed to help. Getting the United States on board IFRS would lend it a huge amount of credibility. However, suggest that companies are suffering from a certain amount of “change fatigue,” so perhaps this should be the appropriate moment to pause and reflect on what has been achieved.

Write short notes on:

Annual Report and its importance

An annual report of a business entity is the end product of accounting processess. All types of organizations need to prepare annual reports at the end of their acccounting period but requirement to be fulfilled may be different in organization to organization according to their nature. Annual reports are prepared at the end of each accounting period and normally presented at the time of their Annual General Meeting (AGM). Annual reports are the summary reports about the financial as well as operational performance of the organization during an accounting period, comparative study with the past performance, effects of environment to the performance and set of achievements to be made in the upcoming period. The annual report is important because:

  • The financial statements like income statement, balance sheet, statement of cash flow etc. provide profitability, financial position and cash flow situation under different activities.
  • Management responsibility for financial reporting addresses do’s and don’ts followed by the organization according to standards.
  • Management discussion and analysis covers all the aspects of the operation during the period and analyzes whether or not the targets where achieved.
  • Financial summary provides a highlight of the economics indicators in a graphical way.
  • Notes to financial statements provide significant non quantifiable matters to be shown or adopted by organization.
  • Report of an independent auditor gives the validity, recognition or proves authenticity about the accounting procedures adopted.

Some Importance Notes

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