1. Are financial accounting statements useful to investors? 2. Describe and discuss the historical cost convention 3. Critically evaluate marginal and absorption costing

Essay by baizUniversity, Master'sB, December 2003

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1. Are financial accounting statements useful to investors?

1.1 Introduction

Financial accounting statements are summaries of monetary data about an enterprise and are used in an attempt to help make informed decisions in the present and future.

Financial statements portray the effects of transactions and other events by grouping them into broad classes (or elements) according to their economic characteristics.

The three basic financial statements are the balance sheet, the income statement and the cash flow statement. There are many different entities that utilise financial statements. Financial statements may be drawn up for private individuals, non-profit organisations, manufacturers and service industries. Three major groups that take advantage of the usefulness of financial statements are large corporations, investors and the government.

Financial statements play a decisive role in each of these entities financial decisions. Corporations decide how much credit to extend to customers and how much should be distributed to investors in dividends.

Investors use a company's financial statements to decide whether or not it would prove advantageous to invest their money, and if so, how much. The government uses financial statements to determine how much an entity is required to pay in taxes.

Each decision as stated above does not always require the same financial statement, however. A balance sheet would be used in the decision-making process for assessing a competing firm and determining a customer's credit limit. It provides the user with data about available resources as well as the claims to those resources. An income statement would prove useful in determining credit extension to customers, distribution of dividends, taxes and investment opportunities. It provides the user with data about the profitability of the enterprise detailing sources of revenue and the expenses which reduce profit.

A cash flow statement would be a useful tool in each instance because it...