Interpreting and understanding accounts
An ACCA case study

Page 2: Accounting: the big picture

Acca 18 Image 8Whether it is in a high street retailer or a bespoke product store, when you walk away from the till with something you want, you have made a purchase. You have the product and the company has the revenue from the sale. A gain has been made by both sides. Put another way, value has been added. The whole purpose of business activity in using resources is to add value in this way. But how much value and at what cost in resources? These questions are at the heart at what accountants must find out. As finance continues to act at the core of all organisations, the role of the finance professional in the future will grow and develop to meet these needs. The ACCA Qualification ensures the professionals of tomorrow have the skills and knowledge to lead businesses.

Accounting statements

Transactions are the heart of a business. Each one is recorded through invoices and receipts. These are carefully classified and combined to form the accounting statements that the managers and other stakeholders in a business require. A stakeholder is anyone with an interest in or an influence upon the business and its activities. First, there are the owners and managers. If they are to keep adding value then they need to monitor and track every use and flow of resources. Accounts contain a detailed history of how the business has used its resources. This is part of the firm’s accountability.

The published accounts tell shareholders how their capital has been managed. They help lenders, investors and suppliers to judge the company’s reliability in keeping to agreements and meeting obligations, showcasing the company’s performance in meeting its obligations. The publication of accounts is a legal requirement. A public company (a plc) must provide a full range of accounting statements including:

  • the Income Statement
  • the Balance Sheet
  • the Cash Flow Statement.

Private companies have slightly different reporting requirements, but many can publish summary information. A sole trader doesn’t have to publish its accounts but still produces accounts for tax and VAT purposes.

ACCA qualified accountants are often the evaluators of all this vital information. It is their job to make sure that such information is accurate and honest. They must resist any pressure towards bias and make sure that the accounts are professionally produced and in exact accordance with the law and standards. They also review, evaluate and assist with narrative reporting of accounts. This is becoming increasingly important as a good story helps deepen the readers’ understanding of the organisation. It is a challenging job but one that is highly rewarding as it takes the accountant right inside the inner workings of a business.

ACCA | Interpreting and understanding accounts

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