Financial reporting requirements
The laws regarding financial reporting and accounting practices vary from country to country, but they also can vary based on the type of organisation (privately held companies, limited companies, etc.) itself. That said, due to the wide variety of legislation all of this could cover, for this Discussion, you will focus only on limited companies. Furthermore, this will be narrowed down to the reporting regulations for limited companies in your own country.
To complete this Discussion:
Post: List and explain three accounting and finance features for limited companies within your own country. Also, explain how accounting and financial reporting are regulated in your country.
[Focussed Discussion] Cash flow statements
One accounting tool that limited companies use frequently is the cash flow statement. In brief, this statement is a breakdown of all cash a company receives (e.g. from investments, operations, etc.) and its expenditures (i.e. for business activities). In this Discussion, you will examine the information provided by cash flow statements, its importance and the methods of calculating cash flows.
To complete this Discussion:
Post: Evaluate the importance of a cash flow statement and explain the basis of your evaluation. Using a self-created example, compare and contrast the direct and indirect methods for calculating cash flows from operating activities.
Financial Accounting and Reporting
Publishing financial reports on regular basis
The United States’ federal securities law states that limited companies must disclose information to the public on various basis. The securities laws require limited companies to submit accurate information that reflect the status of the company. The law requires companies to provide current, quarterly, and annual reports. Publishing of these reports is done on Form 8-K, Form 10-Q, and Form 10-K respectively (Elliot & Elliot, 2011). Annual reports comprise of a detailed overview of the company’s financial performance over the last one financial year. The annual report comprises of audited financial statements to ensure that the information presented to the public represents a true and accurate reflection of the status of affairs at the company.
Limited companies should provide audited financial statements in filing their annual reports with the U.S. Securities and Exchanges Commission. The auditor in this case must be qualified and registered as per SEC requirements (SEC, n.d). An independent auditor examines the limited company’s financial statements for any material misrepresentations, and in accordance to the Generally Accepted Accounting Principles (GAAP). The auditor gives his/her opinion depending on the financial statements’ conformance to the GAAP requirements (SEC, n.d). The auditor either expresses an opinion regarding the financial statements or states that it is impossible to express an opinion, following which he/she must express the reasons.
Can trade shares on stock exchange
Limited companies can trade shares to the public. Limited companies are legally allowed to offer their shares to the public for the purposes of raising capital. Trading of shares occurs publicly through the stock exchange. During the years that the company declares profits, shareholders receive dividends. However, shareholders do not receive dividends for the years that the limited company makes losses. Liability of shareholders depends on the number of shares held. Thus, if the company goes bankrupt, the shareholders’ will only lose the much they have invested.
How accounting and financial reporting are regulated in the U.S.
A number of regulatory boards control financial reporting and accounting in the U.S. The Financial Accounting Standards Board (FASB) is responsible for setting the reporting standards, while the U.S. Securities and Exchanges Commission (SEC) enforce the standards (Elliot & Elliot, 2011). Financing of FASB occurs through levies placed on all public companies. FASB specifically provides three critical documents in relation to the reporting standards. First, the board provides Statements of Financial Accounting Standards. This looks into specific issues involving accounting and reporting standards. Second, it issues the Statements of Concepts, which provide general information. Third, it provides statements for interpretations or clarification of standards. SEC ensures that public companies publish their financial information annually for the benefit of shareholders.
Cash flow statements
Cash flow statements helps financial analysts examine how various changes in the balance sheet of a business, and changes in income influence the level of cash and its equivalent (Alexander, Britton, & Jorissen, 2007). Cash flow statements structure the analysis into three components namely: operations, financing, and investing. Operating activities are those that generate cash for the business. Investing activities are those that involve sale or purchase of assets in the business. Financing activities are those that deal with capital or funding of the business. A cash flow statement is important since it shows the amount of money leaving the business. A business may be profitable but on the other hand, a lot of cash may be held up as accounts receivable. A cash flow statement indicates whether the owners have drawn too much money from the business (Alexander, Britton, & Jorissen, 2007). It is also important as a tool for monitoring business debt. It also helps analyze the impact of loan payments on the bank balance by reflecting the principal payment.
The basis of the evaluation of the importance of the cash flow statement rests on its ability to highlight areas of concern that are not reflected in the company’s balance sheet statement and income statements. Presentation of a cash flow statement takes either the direct or the indirect method. The following example shows presentation of the operating activities of a business using the direct and the indirect method.
Cash flow statement using direct method
|Cash obtained from customers||10,000|
|Cash paid to suppliers and salaries||(2,500)|
|Net cash from operations||7,500|
|Cash flow prior to extra-ordinary items||6,500|
|Extra-ordinary items (gains)||500|
|Net cash flow from operating activities||7,000|
Cash flow statement using indirect method
|Net profit before tax and adjustment of extraordinary items||20,000|
|Adjustments for: Depreciation||500|
|Foreign exchange loss||200|
|Increase in receivables or trade||(400)|
|Decrease in stock||1000|
|Decrease in trade payables||(1,600)|
|Cash from operations||(1,000)|
|Net cash flow from operating activities||18,500|
The direct method includes transactions that occur on cash basis while ignoring the non-cash transactions such as amortization and depreciation. While using the indirect method, net profit or loss occurring within a period is used as the base figure. From the base amount, adjustments are made involving all items that were included in the income statement but did not increase or decrease cash.
Alexander, D., Britton, A., & Jorissen, A. (2007). International financial reporting and analysis. London: Thomson Learning.
Elliot, B., Elliot, J. (2011). Financial accounting and reporting. United Kingdom, UK: Prentice Hall.
U.S. Securities and Exchanges Commission. (n.d). All about auditors: what investors need to know. Retrieved from https://www.sec.gov/investor/pubs/aboutauditors.htm