Page 144 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 11: Introduction to Financial Reporting Framework

assets and its revenues, expenses, gains, and losses based on the existence or absence of donor- Notes
imposed restrictions. Each of three classes of net assets — permanently restricted, temporarily
restricted, and unrestricted—must be displayed in the statement of financial position, and the
amounts of change in each of those classes of net assets must be displayed in the statement of
activities. Governmental bodies, which are guided by the Governmental Accounting Standards
Board (GASB), present general-purpose external financial statements that are similar to those of
other not-for-profit organizations, but they classify their financial statements according to fund
entities.
The rules for the recording, measurement and presentation of government financial statements
may be different from those required for business and even for non-profit organizations. They
may use either of two accounting methods: accrual accounting, or cash accounting, or a
combination of the two (OCBOA). A complete set of chart of accounts is also used that is
substantially different from the chart of a profit-oriented business.

Although laws differ from country to country, an audit of the financial statements of a public
company is usually required for investment, financing, and tax purposes. These are usually
performed by independent accountants or auditing firms. Results of the audit are summarized
in an audit report that either provides an unqualified opinion on the financial statements or
qualifications as to its fairness and accuracy. The audit opinion on the financial statements is
usually included in the annual report.
There has been much legal debate over who an auditor is liable to. Since audit reports tend to be
addressed to the current shareholders, it is commonly thought that they owe a legal duty of care
to them. But this may not be the case as determined by common law precedent. In Canada,
auditors are liable only to investors using a prospectus to buy shares in the primary market. In
the United Kingdom, they have been held liable to potential investors when the auditor was
aware of the potential investor and how they would use the information in the financial statements.
Nowadays auditors tend to include in their report liability restricting language, discouraging
anyone other than the addressees of their report from relying on it. Liability is an important
issue: in the UK, for example, auditors have unlimited liability.

Self Assessment

Fill in the blanks:
9. …………….provide information of value to company officials as well as to various
outsiders, such as investors and lenders of funds.
10. The ………….. to the financial statements are used to present additional information
about items included in the financial statements and to present additional financial
information.
11. The statement of cash flows consists of three sections: cash flows from operating activities,
cash flows from …………., and cash flows from financing activities.
12. The statement of cash flow is prepared in accordance to guidelines issued by ……………...

11.4 Limitations or Drawbacks of Financial Statements

The financial statements are based on certain accounting concepts and conventions which can
not be said to be foolproof.
The following are the limitations of the financial statements:
1. Financial statements are essentially interim reports and therefore, cannot be final because
the final gain or loss can be computed only at the termination of the business.

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