Understanding Financial Statements

Concepts and Their Significance for the Preparation of Financial Statements

Every business needs to make a report structured as financial statements describing its financial position of a given period. Financial statements can be prepared on an annual basis or semi-annually. The four main financial statements that must be prepared include; balance sheet which reflects the financial position of a specified period, Income statement which shows the difference between revenues and expenses of a given period, Statement of Retained Earnings or Statement of Owner’s Equity and Cash Flow Statement that outlines the sources of cash and the use it is put into and also reflects the amount of cash available for day to day operations of a business (Subramani, 2009).

Generally Accepted Accounting Principles (GAAP) provides standard guidelines containing accounting rules applied in financial accounting when preparing a financial statement for privately-owned companies and public trading companies in the United States. It outlines the rules and principles that accountants must adhere to when preparing financial statements. These rules are flexible and are decided by the Governmental Accounting Standards Board (GASB) in the United States. GAAP has been an important tool in preparing financial statements.

Compliance with GAAP helps in increasing credibility with the creditors and stakeholders convincing them together with the outsiders that the financial statements reflect the true financial position of the company. Regular auditing is carried out on the financial statements by certified public accountants to ensure that the information in them is by GAAP requirements. The audited financial statements are used by banks, finance companies and investors to make crucial decisions involving their clients. GAAP also ensures that financial statements are consistent, relevant, comparable and reliable. The financial statement must be based on the following basic assumptions; going concern assumption, periodic reporting assumption economic entity assumption and monetary unit assumption (Subramani, 2009).

International Financial Reporting Standards (IFRS) are accounting standards established in a set form by the International Accounting Standards Board (IASB). These standards are increasingly being used globally in preparing financial statements for public companies. Adopting IFRS in presenting financial statements gives a business advantage in that it enables it to have similar statements with foreign competitors hence no difficulties in making comparisons. It is also advantageous to companies that have subsidiaries in countries that allow the use of IFRS since all companies can prepare common and uniform financial statements. A company that is a subsidiary of a foreign company may be required to use IFRS if it is a must from the headquarters (Wiley-VCH, 2011).

Norwalk Agreement resulted from a convergence between the Financial Accounting Standard Board (FASB) and International Accounting Standards Board (IASB) that declared a memorandum of understanding in October 2002. The convergence of the GAAP of the United States and the International Financial Reporting Standards (IFRS) has been promoted by initiatives undertaken by FASB. These initiatives include; conducting joint projects with IASB which involves sharing of efforts and resources like staff and short term projects meant to enhance the convergence and solve the differences between the IFRS and the United States GAAP. Norwalk Agreement has been an important tool in solving the differences between the United States and the international standards (Bloomenthal, Wolff, & Roberts, 2004).

Generally Accepted Auditing Standards (GAAS) are a set of guidelines organized in a systematic manner used in carrying out audits on the finances of a company by auditors while ensuring that verifiability, accuracy, and consistency is reflected in the auditors’ procedures and reports. GAAS is divided into three main categories that include; general standards, standards of fieldwork and standards of reporting. General standards require the auditor to have adequate proficiency and training, both informational and appearance independence, to exercise professional care when undertaking the auditing task (American Institute of Certified Public Accountants. Auditing Standards Board, 2001).

International Auditing and Assurance Standard Board (IAASB) was set up by the International Federation of Accountants (IFAC) and it functions as an independent body for setting standards. IAASB serves the public by providing high-quality standards used internationally for auditing, review, assurance, quality control, and other related services. It also facilitates and enhances the convergence of both international and national standards. Through these IAASB promotes global uniformity of practice and creates strong public confidence in auditing and assurance professionalism all over the world (Ainapure/ainapure, 2010).

The Annual Report and Supplemental Financial Statements

In September 2009, amendments were made on accounting principles involving revenue recognition by the Financial Accounting Standards Board. Apple responded to the changes made and changed how it accounted for certain products especially iPhone and Apple TV sales. At the beginning of 2010, a form numbered 10-K/A was filled by Apple to amend another form for the year ended in September 2009 number 10-K to make it reflect the current accounting principles. The current accounting principles are not reflected in Form 10-Q found on the quarterly reports of December 2009. Form 10-Q on quarterly reports and Form 10-K containing the annual report before December 2006 affected by the changes in the accounting principles have not been amended and therefore not reliable(Apple 2011).

Swatch Group has a quality management team that ensures security, quality, and reliability of all processes in their operations. The team is also responsible for bringing together documents required to meet international legislation standards. These enable the company to gain the confidence of both external and internal parties as they are guaranteed of quality financial information. Necessary amendments and training of staff are done regularly to ensure that the financial statements are by the current accounting standards (Ltd, 2011).

Nikon Company limited has since been attentive in ensuring that its financial statements are prepared by the accounting principles outlined by the International Accounting Standards Board. The financial statements are amended when need arise to provide the true financial position of the company. All three companies have a similarity in dealing with products that are used in the global market hence their need to comply with the international requirements when preparing their financial statements (Corporation, 2011).


Ainapure/ainapure. (2010). Auditing and Assurance. Delhi: PHI Learning Pvt. Ltd.

American Institute of Certified Public Accountants. Auditing Standards Board. (2001). Generally accepted auditing standards. New York: America Institute of Certified Public Accountantants.

Bloomenthal, H. S., Wolff, S., & Roberts, H. (2004). Emerging trends in securities law. New York: C. Boardman.

Corporation, N. (2011). Nikon. Web.

Inc, A. (2011). Investors Relation. Web.

Ltd, T. S. (2011). Swatch Group. Web.

Subramani, R. V. (2009). Accounting for Investments: Equities, Futures and Options. New York: John Wiley and Sons.

Wiley-VCH. (2011). International Financial Reporting Standards (IFRS) 2011. New York: Wiley-VCH.

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