Briefly discuss the main needs of financial information for the following users (10 marks)

i. Shareholders: There are many users who need financial information of a company, and shareholders are one of them. They need this information because they have their stakes in the company, so they want to look at their equity investments. If they will have adequate financial information, then they will be able to make better and informed decisions. They need to analyze stocks and their performance, which are owned by them. So, it is essential for them to get proper financial information on a regular basis.

ii. Employees: In actual terms, employees have nothing to do with the financial information of the company. But when it comes to winning their trust and confidence, the companies can show this financial information to strengthen their relationship with their employees. The employees will need such information to know, how financially strong a company is, and how secure their job will be in the future. If they will be aware of profitability and stability of their company, then it will increase their confidence level, which is a great thing for the company.

iii. Lenders: A lender will always need financial information of the company to understand the performance of a company so that they can measure their ability to pay back loans in a given time period. Moreover, they also need this information to determine, whether the company will be eligible for any kind of future loans. If they will observe issues in the financial numbers, then they may look for other options to deal with the company to save their loan amount.

iv. Government and tax authorities:   A company is registered by a government to work in a certain area or locations. So, government will need appropriate financial information to see, what profits are being earned by the company, and what resources can be allocated to a company. The tax authorities need this information to determine, how much profit is earned, and if taxes are being paid as per the income so that companies cannot hide anything.

b) Explain the following accounting concepts/ qualitative characteristics of accounting information: (15 marks)

i. Historic cost: Every entity has accounting records for its assets. So, the original cost of entity’s asset is called historic cost. This original cost is recorded in the records when asset was originally acquired for the first time. If a company wants to trace historical cost of its asset, then it can be found in its own accounting records, or it can also be found in the trade documents, when purchase was made. It is important to mention that historical cost has a disadvantage that actual fair value of the company’s asset is not represented by this historic cost.

ii. Business entity: It is vital to understand that when a business entity is analyzed as an accounting concept, then it is an organization, which is separate from its owners. A business entity will maintain its accounting records separately, and if there is any other owner involved in the process, his/her liability and assets will not be recorded for this business entity. If this concept of business entity is excluded, then records of company will be mixed with the record of owners, and data will be messed up, which cannot be understood.

iii. Prudence or Conservatism: It is one of the vital accounting concepts, which tells that income and assets of a company should never be overstated. It means a company should ensure that revenues’ amount is never overestimated, and expenses’’ amount is never underestimated. It means that a company will be more conservative in its approach, when they are recording their assets, so financial statements given with such concept will be conservative in nature.

iv. Monetary measurement: According to this concept, an accounting transaction of a business should only be recorded, when it can be expressed with regards to money. It means that monetary measurement concept is just focusing on the quantitative information, and it has nothing to do with any qualitative information.

v. Faithful Representation: According to this concept, when financial statements are prepared and produced by the firms, it should show what the actual state of business is. It means that data provided in the financial statements is the actual reflection of conditions of a business, rather giving any misrepresented facts and figures. If it has been stated by a company that it will have certain amount of money in its balance sheet at a certain date, then amount of money should be there on the given date.

vi. Relevance: As per this concept in accounting, it is said that information being provided the accounting system should be relevant to the needs of decision making, which are required by a user of the system. For instance, the information will be considered relevant if it will help the company to make better and informed decisions by keeping future trends in the context.