BE110 Financial Reporting AnalysisWord文件下载.docx

1、 the first part is to judge whether the information of the reporting entity from financial statements is comprehensive enough to existing and potential stakeholders via the concepts of capital maintenance. Through the information of four main components of financial statements to analyze the general

2、 purpose of financial statements another section. The Financial Accounting Standard Board （1980） states “ A Conceptual Framework is a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function and limits

3、of financial statements.” In other word, the Conceptual Framework is regarded as a theoretical system which has a series of coherence and interrelated objectives and standards and the initially intentions are clarifying the nature, scope as well as purpose of financial accounting and reporting （Jack

4、ling, Raar, Wliliams and Wines,2007）.TheConceptualFrameworkprimarily dealswith four issues. The first one is the objective of financial statements, next is the qualitative characteristics that determine the usefulness of information in financial statements. Then, the definition, recognition and meas

5、urement of the elements from which financial statements are constructed are third issue. The last part is the concepts of capital and capital maintenance （Horngren et al. 2004, p: 492）. Capital maintenance plays a vital role in the ConceptualFramework. The concepts of capital maintenance may be clas

6、sified into two categories: financial capital maintenance and physical capital maintenance （Hayek, 1935）. Financial capital maintenance implies that the profit earned in corporate net assets at the end of a period higher than the amount at the beginning of the period under the premise that excludes

7、any inflows from or outflows to owners （Schroeder, Clark and Cathey, 2011）. It can be gauged either in nominal monetary units or constant purchasing power units （Lemke, 1982）. Physical capital maintenance is also named operating capital maintenance and it occurs that a enterprise obtain a return on

8、income when the physical productive or operating capacity of enterprise at the end of a period exceeds its capacity at the beginning of the period without transactions such as any contributions or distributions of owners （Schroeder, Clark and Cathey, 2011）.In current society, the financial statement

9、s are not comprehensive enough to existing and potential stakeholders. Financial statements only support the information of the financial aspect, but other categories such as social and environment sections. There are three major weaknesses of financial statements. The first one is that financial st

10、atements only disclosure the historical information and the timeliness is not strong enough （Meyer, 1961）. Along with intense competition among enterprises and financial tools changing, sharp changes have taken place in economic circumstance, the management and financial risks of the enterprise may

11、follow the conversion, thus, the reporting entity request accounting changes along with the business, to provide real time information. Therefore, the usefulness of the financial information disclosed in financial statements depends significantly on its timeliness （Kothari and Ball, 2004）. As an exa

12、mple, if the financial statements are not timely, the enterprise apparently cannot predict the trend of management and financial activities in the future. However, for stakeholders, the most critical thing is the future decision. Hence, there is no reference valueof financial statements which loss t

13、he timeliness and capital maintenance may be affected to a certain degree.The second weakness is that financial statements do not consider the social and economic environment such as the inflation （Meyer, 1961）. The current accounting system mode is used in accordance with the principle of financial

14、 capital maintenance and financial accounting is based on historical cost （Hung, 2000）. Due to the inflation, the enterprises economic resources is distorted, the carrying amount of assets from the assets of the existing cost. Then, the product cost is not true and price inflation causes the inflate

15、d profits. For the purchasing power of monetary items, the holding gains and losses are not disclosed in financial statements. Therefore, the financial statements which excluding the inflation emerge the phenomenon of undervaluing assets value and overestimating corporate earnings. These untruthfuln

16、ess financial position and operating profits of an enterprise reduced the authenticity and correlation of accounting information, so that the existing and potential stakeholders may not reach the capital maintenance. Moreover, financial statements can only reflect the physical assets of enterprise o

17、wing to monetary measurement. However, intangible assets gradually become a significant resource for enterprises to create value （Hung, 2000）. Not all the intangible assets can use money to measure and show on financial statements. Financial statements cannot present the intellectual property, the c

18、ompetitiveness of products and enterprise, the quality and management of human resources and the innovation ability of products and technology and any other soft assets （Kothari and Ball, 2004）. If a corporate only rely on the physical assets, it is hard to keep the sustainable competitive. Especial

19、ly in the high-tech and information enterprises, the contribution of the human capital and intangible assets is far bigger than the tangible assets. It can be extended that intangible assets bring a crucial impact on capital maintenance, particular the physical capital maintenance.It can be seen abo

20、ve that financial statements and capital maintenance are relevant. Financial statements have three main functions to be analyzed. The first one is to analyze the solvency and the structure concerning the rights and interest of enterprises in order to estimate the utilization level of the debt capita

21、l. The second one is to evaluate the operating ability of enterprise assets so that can analyze the distribution enterprise assts and the usage of turnover. The last one is that the evaluation of the enterprises profit ability can analyze the completing situation of profit target and the changing ci

22、rcumstance in diverse annual profit degree of enterprise （Meyer, 1961）. Therefore, existing and potential stakeholders can achieve financial capital maintenance through the information of financial statements because the financial statements may support financial information and date. But, the infor

23、mation of financial statements is not comprehensive enough to reach the physical capital maintenance. The physical capital maintenance requires considering other aspects information such as social situation and economic environment and so on. There are four major components in financial statements,

24、they respectively are Income Statement, Statement of Financial Position （Balance Sheet）, Cash Flow Statement and Statement of Changes in Equity. Income Statement measures all amount of income and expense during a specific period. The financial information on the Income Statement, which can be used t

25、o evaluate the management efficiency and operating results of an enterprise and estimate the value and returns of investment so that can measure a firms success in management （Foulke, 1968）. In particular, Income Statement has the following several functions: Income Statement can be regarded as the

26、distribution foundation of operating results. The data such as the operating cost and income, business taxes, non-operating revenue and expenditure will directly affect the interests of existing and potential stakeholders, such as the national tax revenue, the bonus of managers, the wages and other

27、remuneration of workers and shareholders dividends, etc. Then, Income Statement can comprehensively reflect different aspects of the production and operation activities and assist to assess the job performance of management personnel. Furthermore, Income Statement can be used to analysis the profit

28、capability and predict future cash flow of enterprise （Chesnick and Eversull, 1994）. Balance Sheet states the financial position of an entity at a specify date, therefore, also known as static statement （Foulke, 1968）. It is based on a double entry system to reach two sides balance out. The proof of

29、 this balancing act is shown in the balance sheet when Assets = Liabilities + Equity （Eversull and Chesnick, 1995）. The function of balance sheet is to mainly provide the information regarding the financial situation of enterprise. For instance, through the Balance Sheet, it can supply the total amo

30、unt and structure of assets at a certain date and show that the enterprise owned or controlled resources and their distribution. To be brief, it presents how many resources are current assets, how many resources are fix assets and how many resources are long-term investments, etc. On the other hand, Balance Sheet can outline the amount of assets or se