Question

1.) Explain why the notes are an integral part of the financial statements

2.) Explain why the characteristics of comparability and consistency are important in financial reporting

3.) Explain the differences between accounts payable, short-term debt, current maturities of long-term debt, accrued liabilities and unearned revenue.

Answer 1

1)Financial statements are prepared to find out the results of the business.Trading&profit and loss account is prepared to find out profit or loss of the business.To ascertain the financial position of the business a balancesheet is prepared.

The notes are an integral part of financial statements.The notes are also referred to as footnote disclosures.

Notes are important because all relavant financial informations can be communicated through the amounts shown in the financial statements.It helps a company to comply with the full disclosure principle.for example,At the end of the year,the value of plant&machinery shown in the balancesheet after reducing depreciation.the balancesheet shown the actual amount only.but the calculation of depreciation not shown in the balancesheet.it shown as footnote under the balancesheet.

IMPORTANT NOTES TO FINANCIAL STATEMENTS

1)A Summary of the company's accounting policies relating to estimates,inventories,revenue recognition,property&equipment,goodwill and other intangible assets,discontinued operations of business,Foriegn currency translation and recently issued accounting pronouncements etc.

2)The details regarding shedule of amounts for items such as inventories,accrued liabilities,income tax ,employee benefit plans,leases,fair value mesurement ,derivative instruments&hedging,stock options,commitments and contingencies etc.

3)A Shedule of assets regarding the addition and sale of asset and the deoreciation at the end of the year.

2)IMPORTANCE OF COMPARABILITY AND CONSISTENCY IN FINANCIAL REPORTING

Comparability of financial statements is very important to every business because it allows us to compare the financial statements of the current year with the previous years.And also compare with the financial statements of other companies in the market.

If we compare the financial statements with the previous year is helps to find out the changes in financial position in the business.the changes in Net income,sales,production,cost of good sold etc are compared.if we compare with other company's financial statement helps us to find our positon in the market based sales and profitability.

Consistency in financial reporting means the continual use of same accounting policies for preparing financial statements over a period of time.If the company followed same accounting principles and method for a long period,it helps to comparability because the comparison of financial statements with previous year made easy.

3)ACCOUNTS PAYABLE

Accounts payable is also known as creditors.A person or entity to whom the business owes money as he has given some benefit (product or service) to the business.It is the current liability of the business.it shown in the balancesheet under the head 'Acconts Payables' on the liability side.

SHORT TERM DEBT

Short term debt is also known as current liabilities.The liabilities which become due and payable within a shor time ie,one year or less it is called short term debt.the examples of short term debts are creditors,bills payable,outstanding expenses,bank overdraft,income recieved in advance etc.

LONG TERM DEBT

Long term debt means the liabilities that are to be settled only after one year or more.They are also known as fixed liabilities.the maturity of the debt is fixed.Examples are long term loans,debentures,bonds etc.

ACCRUED LIABILITIES

It is also known as outstanding liabilities.The expenses which have become due for payment.it should have been paid during the current year but have not been actually paid are called accrued liabilities.For example,the salary of the employee is Rs 20000 per month and if only Rs 200000 paid for the year.(annual salary=20000*12=240000),the balance of Rs 40000 which is due but not paid.it is called outstanding salary.the amount is shown in the balancesheet as current liabilities.

UNEARNED REVENUE

Unearned income means income recieved but not earned during the accounting year.it is also known as income recieved in advance.It is a current liability.For example,A Building has been given to a tenant for rent Rs 60000 per annum.but during the year Rs 70000 has been recieved;Rs 10000 is unearned income.