Financial Accounting Different authorities in the field define accounting differently

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Financial Accounting Different authorities in the field define accounting differently. However, there is congruence in all the definitions concerning the observation that accounting provides decision-supporting information to users of a company’s financial statements (Brigham and Ehrhardt 34).
The users referred to in this statement include both external users of accounting information and the internal users of accounting information. The purpose of this paper is to look into the issue of who the external and internal users of accounting information are and how they use the accounting information.
To clearly explain this, the paper will focus on two business entities whose shares are publicly traded on the London Stock market. The paper will use the income statement and the statement of financial position from Premier Oil PLC and Genel Energy PLC.
The two companies traded under the oil and gas producer main market segment of the London Stock Exchange. Premier Oil PLC trades under the ticker symbol PMO while Genel Energy PLC trades under the ticker symbol GENL.
At the time of presenting this report, the two companies were trading at 57.8 GBX and 94.77 GBX respectively. The paper begins with a brief history of the two companies as provided below.
The history of Premier Oil PLC dates back to 1934 when the company started as Caribbean Oil Company. Its core business includes the exploration of oil and gas. At the moment, PMO has oil and gas interests in the UK, Africa, and Asia. The British oil company reported a net loss of $1,103.8 million in 2015 compared to a loss of $210.3 million in 2014 (Premier Oil PLC). The loss resulted from the reduction in the annual sales revenues of the company from $1,629.4 million in 2014 to $1,067.2 million in 2015. The financials of the company will be analyzed further in another section of this report.
Genel Energy PLC, on the other hand, started its operations about a decade ago under the name Genel Enerji. The company as known today, however, started its operations in 2011 as a result of a reverse acquisition transaction of the Turkish Genel Enerji.
The company explores for oil and produces its oil from the Kurdistan region in Iraqi. In 2015, the London exchange listed company reported a total loss for the period amounting to $1,161.6 million while in 2014, the loss for the period stood at $314.3 million (Genel Energy PLC).
The loss was as a result of the declining oil prices leading to declines in the annual revenues with the decline from $519.7 million in 2014 to $343.9 million in 2015.
The financials of the company will be analyzed further in another section of this report but before then, the following few paragraphs will provide details on the users of accounting information with examples from the two companies mentioned herein.
Users of Financial Statements Internal users of accounting information are also referred to as the primary users. The primary users include majorly of the management of the firm, the employees of the firm, and the owners of the firm. The management uses the accounting information in the analysis of the firm’s performance and position. They take into consideration any information that would enable them to improve the results of the business entity. The management accesses accounting information from management reports and other reports prepared under the management accounting branch of accounting. The reports consumed by the management of the organization are more detailed than the accounting reports and information consumed by the employees as well as the owners of the organization (Brigham and Ehrhardt 28).
The employees use the accounting information and financial reports for the assessment of the firm’s performance and position and how this performance influences the future remuneration of the employees as well as their job security.
Weak or weakening financial performance as indicated by losses in the income statements may indicate the likelihood of little to no growth in the remuneration of the employees, and if prolonged, the losses may even mean that the employees take remuneration reduction or even job cuts and lay-offs.
Consequently, the employees would be keen in ensuring that the company reports growth and good performance to protect their interest in the firm (Brigham and Ehrhardt 41). The third group of stakeholders includes the owners or shareholders of the organization.
These may be involved in the direct running of business entity and may not be directly involved in its day-to-day operations. The owners or shareholders need the accounting information to assess the profitability of their investments in the firm and with this information, these users make decisions on the action that they ought to take on the firm.
Notably, overall observation concerning the internal users of accounting information is that they require the accounting information to make decisions that may have direct implications on the direct operations of the firm.
Common accounting information used by the internal stakeholders, therefore, include management accounts, budgets, forecasts, and the common financial statements from financial accounting. The other group of users is called the external users or the secondary users of accounting information.
These are users outside the realm of the company’s internal operations of the organization but by being involved in one way or another with the firm, the also have the capacity to influence its internal decisions.
The three user groups discussed under the external user’s section include the creditors, the tax authorities, and the investors. The creditors need the accounting information of the firm to be able to determine its credit worthiness.
Consequently, these users of accounting information look into any financial and non-financial information that may influence the credit rating of the firm, and this is why the consideration of the health of the firm becomes important ((Brigham and Ehrhardt 73).
These users majorly use information from the company’s periodic financial reports and are majorly keen on the asset and liability balances of the firm as well as information on the profitability of the firm as this indicates the firm’s ability to raise funds to meet its current and maturing obligations.
The second major interest group includes the investors in the firm. It is important to note that investors are not necessarily owners of the firm, but there are instances in which they two are the same.
The investors use the financial reports of the company to determine the company’s potential of generating a return on investment for the investors. Consequently, this group of accounting information users uses the information to make an informed determination on whether or not they should commit their resources to the firm.
Notably, this group of financial reports users mainly looks into information on the profitability of the company among other factors such as ownership structure. Other than the creditors and the investors, there are also the tax authorities who are concerned about the company’s reporting activities and how they affect the taxable income of the corporation.
These users of accounting information use the information to make an informed determination on whether the firm correctly reports accounting information representing a true and fair view of its performance for tax purposes (Brigham and Ehrhardt 53).
One common thing about the external users of accounting information is that they mainly use information from financial accounting branch of accountancy. It is from this branch that the annual financial statements and reports are produced.
These documents are documents available in the public domain and therefore available to users outside the organization. Critical Analysis The management requires financial statements and other accounting information to make important decisions affecting the operations of the firm.
One important type of information that the management may require includes information on the costs of the firm. This is because one of the key roles of the management is to make cost management decisions in the firm.
This report obtained data from the financial reports of Premier Oil PLC and Genel Energy PLC for the last three years. According to the analysis of the costs of the two companies in comparison to the revenues, Premier Oil PLC operates at higher costs with an average of 60% over the three years in focus (Premier Oil PLC)).
On the other hand, the costs of Genel Energy PLC stood at an average of 47%. This indicates that there are better cost management practices at GENL as compared to PMO.
Premier Oil PLC 2015 2014 2013 Cost of Sales $ 661.00 $ 986.20 $ 856.10 Sales Revenue $ 1,067.20 $ 1,629.40 $ 1,501.00 Cost to Sales ratio 62% 61% 57% 60% Genel Energy PLC Cost of Sales 208.3 203.1 140.7
Sales Revenue 343.9 519.7 347.9 Cost to Sales Ratio 61% 39% 40% 47% The employees use financial statements to determine any financial actions by the firms that are likely to affect their job security as well as their remuneration. Based on this information, the employees consider making decisions to leave or continue working with the organization based their informed decisions on the security of their jobs in the organization. At times of falling profitability, for instance, the employees would want to know how their benefits in the organization are affected.
From the analysis of the financial statements of PMO and GENL, the long-term employee benefit plans recorded losses at PMO. The losses amounted to $0.1 million in 2015, $0.2 million in 2014, and $6.5 million in 2013. This indicates the need for the employees to look into the security of their long-term benefits and pension schemes. On the other hand, the analysis of the financials of GENL indicates that there seems to be no pension scheme for employees. However, the employees are allowed to share the benefits of the organization through ESOPs.
The owners of the organization, as well as the investors, would be concerned with the profitability of the organization. The analysis of the two companies in question indicates that they made losses consecutively for three years to 2015. This results in the erosion of the value for the current owners and the prospective investors, they ought to consider not investing in the two companies at the moment. The losses of the two companies for the period are as shown in the chart below. The chart indicates that PMO reports higher profits in dollar value as compared to GENL.
The last two user groups include the creditors who would be concerned about the firms’ liquidity and solvency and the tax authorities who would be concerned about the firms’ reporting practices and how they affect the taxable income. From the qualitative information in the reports, the two firms report their taxable income based on international standards hence no understatement of the taxable income. On the other hand, the liquidity and solvency of the two firms were analyzed as shown in the table below. From the analysis, GENL has stronger liquidity and solvency position as compared to Premier Oil PLC hence it is more credit-worthy.
Premier Oil PLC 2015 2014 2013 Current Assets $ 814.80 $ 1,116.90 $ 1,018.50 Current Liabilities $ 594.20 $ 992.70 $ 655.80 Current Ratio 1.37 1.13 1.55 Total Assets $ 5,305.90 $ 6,087.60 $ 5,813.90 Total Liabilities $ 4,571.10 $ 4,215.40 $ 3,689.50
Solvency 1.16 1.44 1.58 Genel Energy PLC Current Assets $ 534.30 $ 792.80 $ 715.50 Current Liabilities $ 83.60 $ 190.20 $ 173.00 Current Ratio 6.39 4.17 4.14 Total Assets $ 3,501.70 $ 4,487.30 $ 4,352.60 Total Liabilities $ 926.90 $ 753.80 $ 248.40
Solvency 3.78 5.95 17.52 Conclusion In conclusion, this paper presents the analysis of the users of financial statements. The analysis drew from two companies both of which are traded in the London stock market. The two companies whose three years data was analyzed include Premier Oil PLC and Genel Energy PLC. The critical analysis covered information that each of the six user groups would require. Genel Energy performs better than Premier Oil based on the comparative analysis herein presented.