Desirable qualities of financial information: timeliness, comparability and understandability.
Apart from relevance and objectivity accounting information should be timely in the sense that it should be produced ‘reasonably soon’ after the end of the accounting period to which relates. If there is too long a delay, the accounting information produced will lose the relevance it otherwise might have had.
Accounting information should also be timely in the sense that the reporting intervals should be frequent enough to meet the user’s needs. If the reporting interval is too long, information produced may only be available after the point in time when a decision should have been made.
When arriving at judgment or decisions users will often compare accounting information produced by different businesses. It is therefore useful if items or events common to different businesses are measured and presented in the same manner. Similarly, items or events occurring within the same business should be measured and presented in the same manner from one period to another. In other words, accounting information should possess the quality of comparability.
And last but not least is understandability.Users will only be able to employ accounting information in a sensible way if they are able to understand it. This means that accounting information should be set out in a clear and logical manner and not be unnecessarily complicated.
Desirable qualities of financial information: relevance and objectivity.
The most important quality is certainly relevance. Accounting information is said to be relevant if it has the potential to influence the decisions and judgments of users. Relevance is often regarded as the primary quality of accounting information as it embodies the basic idea that accounting exists in order to meet the needs of users. Accounting information which is irrelevant provides no benefits to users and does not, therefore, justify the costs of producing the information. It has been suggested that accounting information will be relevant if it helps users to predict the future and / or provides feedback to users which helps them evaluate the accuracy of earlier predictions.
Another important quality is objectivity. Objectivity, i.e. impartiality, can be divided into two elements: 1) verifiability, and 2) freedom from bias.
Verifiability suggests that the information produced can be independently observed or tested. This means that qualified accountants handling the same basic data but working independently would produced the same results.
Freedom from bias suggests that the information produced will not favour the interests of a particular group of users at the expense of another.
The higher the degree of objectivity the greater the confidence users are likely to have in the information produced.
Filing system. Three parts of account.
When large amounts of data are gathered in the measurement of business transactions, a method of storage and retrieval of information is required. In other words, there should be a filing system to sort out or classify all the transactions of a business. Only on this way financial statements and other reports be prepared quickly and easily.
This filing system consists of accounts. An account is the basic storage unit for data in accounting. In its simplest form an account has three parts: 1) a title that describes the asset, liability, or owner’s equity account, 2) a left side, which is called the debit side, and 3) a right side, which is called the credit side.
This form of account , called a ‘T’ account because of its resemblance to the letter ‘T’, is used to analyze transactions
Thus any entry made on the left side of the account is a debit entry, and any entry made on the right side of the account is a credit , or credit entry. The terms debit (abbreviated Dr, from the Latin debere) and credit (abbreviated Cr, from the Latin credere) are simply the accountant’s words for left and right.
Indirect taxesare levied on the production or sale of goods and services. They are included in the price paid by the final purchaser.
§ In most European countries, companies pay VATor value –added tax, which is levied at each stage of production, based on the value added to the product at that stage. The whole amount is added to the final price paid by the consumer. In Canada, Australia, New Zealand and Singapore, this tax is called goods and services taxor GST.
§ In the USA, there are sales taxes, collected by retailers, levied on the retail price of goods.
§ Governments also levy excise taxesor excise duties– additional sales taxes on commodities like tobacco products, alcoholic drinks and petrol (BrE: petrol; AmE: gasoline).
§ Special taxes, called tariffs,are often charged on goods imported from abroad.
Income tax for individuals is usually progressive:people with higher incomes pay a higher rate of tax (and therefore a higher percentage of their income) than people with lower incomes. Indirect taxes such as sales tax and VAT are called proportionaltaxes, imposed at a fixed rate. But indirect taxes are actually regressive:people with a low income pay a proportionally greater part of their income than people with a high income.
History of emergency and growth of stock exchanges.
Stock Markets are the means through which securities are bought and sold. The origin of stock markets goes back to medieval Italy.1 During the 17th and 18th centuries Amsterdam was the principal centre for securities trading in the world. The appearance of formal stock markets and professional intermediation resulted from the supply of, demand for and turnover in transferable securities. The 19th century saw2 a great expansion in issues of transferable securities.
The popularity of transferable instruments as a means of finance continued to grow and at the beginning of the 20th century there was an increasing demand for the facilities provided by stock exchanges, with both new ones appearing around the world and old ones becoming larger, more organized and increasingly sophisticated.
13. How can financial market be classified?
Generally, financial markets are classified as money or capital markets and primary or secondary markets.
Money markets deal in short-term securities having maturities of one year or less. Capital markets deal in long-term securities having maturities greater than one year. An investor who purchases new securities is participating in a primary financial market. An investor who resells existing securities is participating in a secondary financial market.
Laws, rules and standards.
Laws, rules and standards
In most continental European countries, and in Japan, there are laws relating to accounting, established by the government. In the US companies whose stocks are traded on public stock exchanges have to follow rules set by the Securities and Exchange Commission (SEC), a government agency. In Britain, the rules, which are called standards, have been established by independent organizations such as Accounting Standards Board (ASB), and by the accountancy profession itself. Companies are expected to apply or use these standards in their annual accounts in order to give a true and fair view.
Companies in most English-speaking countries are largely funded by share holders, both individuals and financial institutions. In these countries, the financial statements are prepared for shareholders. However, in many continental European countries businesses are largely funded by banks, so accounting and financial statements are prepared for creditors and the tax authorities.
Non-payment of tax
To reduce the amount of income tax that employees have to pay, some employers give their staff advantages instead of taxable money, calledperks,such as company cars and free health insurance.
Multinational companies often register their head offices in tax havens – small countries where income taxes for foreign companies are low, such as Liechtenstein, Monaco, the Cayman Islands, and Bahamas.
Using legal methods to minimize your tax burden –the amount of tax you have to pay – is called tax avoidance. This often involves using loopholes –ways of getting around the law, because of an error or a technicality in the law itself. Using illegal methods – such as not declaring your income, or reporting it inaccurately–is calledtax evasion, and can lead to big penalties.
16.Problems of the international monetary system and processes which it management.
The international monetary system is afflicted with problems. The main reason is that the nations that participate in it are politically independent but economically and financially interdependent.
This discrepancy determines the functions of the international monetary system; at its best, the system acts to reconcile the conflicting economic policies of its politically independent members.
In order to perform this reconciling function, the system is concerned, first, with how nations act to influence their balance-of-payments positions, with their policies that affect exchange rates.
The system is concerned, second, with how nations settle their accounts with one another. Third, the system is concerned with the amount and form of international money.
In broad terms, the international monetary system involves the management, in one way or another, of three processes:
1) the adjustment of balance-of-payments positions, including the establishment and alteration of exchange rates;2) the financing of payments imbalances among countries by the use of credit or reserves; and 3) the provision of international money.
17.Some of the major users of accounting information: owners, lenders and suppliers of goods and services.
Some of the major users of accounting information are: 1) owners of business, 2) lenders of money, such as banks, 3)suppliers of goods and services, 4) managers of businesses, 5) customers of a business, 6) employees, 7) governments, 8) the public, 9) competitors.
Owners. Owners normally invest in business in order to increase their wealth. The major decision confronting owners and potential owners is whether or not to invest or retain an investment in a business.
Lenders.Lenders can be conveniently divided into two groups: 1) shot-term lenders, and 2) long-term lenders.
Short-term lenders (i.e. those who lend money for up to 12-month period) will normally be concerned with the ‘liquidity’ of the business. Like owners, long-term lenders are concerned with the longer term prospects of the business. They are interested in likely future risks and rewards, and in the efficiency of management.
Suppliers of goods and services. Suppliers of goods and services need to ensure that a business is able to pay for the goods and services provided. They will, therefore, be concerned with the liquidity of a business. It is quite common to find that some suppliers provide a business with a substantial and continuous flow of goods and services. For suppliers in this position, the long-term prospects of the business may be of great interest
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