Preparing Financial Statements

To put together a financial statements

It is vital to get a grasp of the main accounting principles that rule the fin statements’ preparation process. Those principles as accruals, consistency, matching, going concern and the full disclosure that are among others. They are necessary before starting the of the statements’ preparation.

Utilization as a communication tool

At first, one should understand that while concocting the accounting reports, they are utilized as a communication tool between stakeholders and the accountant. That is why “the accountant is required to produce financial statements that are specifically relevant to the user requesting [the accounting reports]” (Elliot B. & Elliot J. 5). That is why accounts that will be prepared for delivery to the manager will be different to those that are prepared for delivery to the investor and even lenders. Managers may need the information for making policy decisions for a company, investors may rely on the information for investment decisions, while the lenders may need this information to make decisions on creditworthiness of the company.

Different contexts for which the accounting reports may be prepared

From the fact that there are different used, there are several contexts for which the accounting reports may be prepared. One such contexts is time. Under this context, the accounting period assumption is used. This assumption states that “that the continuum of time can be subdivided into a number of discrete time periods (accounting periods)” (Unegbu, 10). As such, it is important that the accounting periods be installed to ensure that there is a standardized reporting time frame for the statements. Therefore, based on this assumption, I would set an accounting period at one year. As such, I would deliver annual financial statements at the end of the trading period. However, I would keep monthly records for ease of data tracking. Each of the financial statement would have dates to ensure that they are placed in the right time context.

Honesty and accuracy

Apart from providing timely feedback, I would ensure that the honesty prevails. Based on this, Beest, Braam and Boelens have noted that “annual reports must be complete, neutral, and free from material error” (11). This means that I have to ensure that I personally obtain data from the source documents. This will include information on sales and expenses when preparing the profits and trading accounts, information on assets and liabilities when preparing information on for the balance sheets, and information on cash inflow and cash outflow for cash flow statements. This will ensure that the information is not corrupted in anyway before it is entered in the final records.

Main financial statements

As an accountant, I would focus on four main financial statements. The first is the balance sheet. This is a financial statement that is used to ascertain the financial position of a company. The balance sheet is prepared and dated as at the end of a trading period. To prepare this, I would deploy the basic accounting equation, which holds that assets equals the sum of capital and liabilities. In other words, the left hand side of the balance sheet (debit side) has to tally with the right hand side of the balance sheet (credit side). The balance sheet total would then indicate the financial position of the company.

The second of the most important statements would be the income statement. To prepare this, accurate information detailing the revenues generated and expenses incurred over a trading period. Elliot and Elliot point out that “it has been accepted accounting practice to view the income statement...as a better predictor of future cash flows to an investor” (18). As such, it means that the most accurate methods, right from obtaining information and processing it, would be adopted to ensure accuracy. To obtain the income for a given trading period, I would subtract the expenses from the revenues. I would then debit positive balances and credit any negative balances. A positive balance would mean profit and would therefore be subjected to the taxation mechanisms and other changes to obtain the net profits that I would then post to the balance sheet.

Thirdly, to prepare the statement of cash flows, I would collect the required information on the cash inflows and cash outflows in order to ascertain the liquidity of the company. In other words, this would measure the ability of the company to meet its immediate obligations. As such, crucial signs to look for in this statement is the nature of the balance. To obtain this balance, I would subtract the cash outflows from the cash inflows. A positive balance would mean the company has the ability to meet its immediate obligations. On the other hand, a negative balance would mean that the company is illiquid and cannot meet its immediate obligations. As such, this would be indicated with a red mark to signal the management that they need to cut costs or improve the business model.

Finally, in order to ensure efficiency and to avoid confusion, I would prepare the cash flow and the income statements first before proceeding to the balance sheet. The income statements would yield the profits that would then be transferred to the balance sheet in order to find out the eventual position of the business. While ensuring this order is followed, accuracy and timeliness is important to ensure that the information presented in the statement of accounts is correct. It is important to confirm and recheck the statements to ensure that the information is correct and above all, conforms to the accounting principles and standards.

Works Cited

Beest, F. van, G. J. M. Braam, and Suzanne Boelens. “Quality of Financial Reporting: measuring qualitative characteristics.” (2009).

Elliott, Barry, and Jamie Elliott. “Financial accounting and reporting.” Pearson Education, 2007.

Unegbu, Angus O. ”Theories of accounting: Evolution & developments, Income-determination and diversities in use.“ Research Journal of Finance and Accounting.4633 (2014).