Preparation And Presentation Of A Company 's Financial Statements

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1 Introduction 1.1 Background to the study Preparation and presentation of a company’s financial statements is a process that is laden with the use of estimates. The conceptual framework released by the Financial Accounting Standards Board indicates that a company prepares financial statements with the intention of assisting investors assess the company’s future cash flow prospects (Financial Accounting Standards Board, 2010). However, the process used by a company in assessing its cash flows is reliant on the use of estimates and conjecture. For example, the company has to determine the fair value of its assets on an ongoing basis if approximate value in the market is to be reflected in the financial statements. These values are arrived…show more content…
It has also been argued that the increased use of complex financial derivatives contributed to the confusion regarding the use of fair value accounting, especially among those companies that lacked deep insight into the operations of the financial world (Laux & Leuz, 2010). Even when there was adequate knowledge on how these derivatives were to be accounted for, there are arguments that companies failed to interpret the guidelines as would have been expected. 1.2 Statement of the problem Generally, there are two approaches in determining the value of a company’s assets and liabilities (Laux & Leux, 2009). One, the company can use the historical cost approach. Under this method, the purchase cost is used as the basis of determining other factors such as the asset’s loss of value that occurs over time. Therefore, a building acquired five decades ago would be presented in the financial statements either at the cost at which it was built or the cost of land plus construction. Depreciation is then deducted from this cost over its lifetime. The historical cost method has some obvious drawbacks. The historical cost method disregards the occurrence of events that have the impact of reducing the asset’s value (Hitz, 2007). For example, it is possible that the cost of land will have appreciated immensely over the
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