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Effects That Accounting Choices Have On Users Of Financial Statements

advgsgrAbstract

The paper is an examination of the effects of accounting choices on users of financial statements. First of all, a historical examination in the subject matter was examined. It was found that most researches normally dwell on single characteristic effects of accounting decisions on financial statement users. Current GAAP on the matter also concurs with the latter matter.

It was therefore found that there may be a need to look at how these factors intertwine in affecting users of financial statements. Since firms may have to content with a number of effects at any one time, it is important to carry out a study on a combination of factors. Thereafter, an analysis ought to be done in order to investigate which factor is the mot important and which one takes least precedence. This can go a long way in assisting managers and other financial decisions makers about accounting choices in the future.

Introduction

There are a number of users of financial statements within any respective firm. Usually, some of the intended effects of accounting choices can become real effects. On the other hand, there are also foreseen consequences that may emanate from external or internal factors. The essay shall examine some of these issues through existing research on the matter. Suggestions will be made on problematic areas and possible courses of actions will also be laid out. The latter suggestions will be particularly useful to the public accounting body owing to the fact that some loopholes on the subject matter will be identified. (Riper, 2006)

Historical development of theory

A lot of research has been done with regard to voluntary accounting choices. This is largely because the effects of such choices are more clear cut and predictable. For instance, a number of accountants have utilized the issue of accounting discretion in order to understate their financial performances during periods of string performance and also to overstate their financial status during periods of low performance.

Research has shown that there are three major reasons why firms can choose to engage in certain income decreasing or income increasing activities. First of all, this may be motivated by the need to include the economic events that are prevailing at that time. Secondly, such accounting choices may be motivated by strategic objectives within the corporation under consideration. Lastly, engaging in such accounting choices can be motivated by a combination of both economics and company strategy. Usually, the accountant enacting these changes may be motivated in their very own expectations. (Hopwood, 2008)
Managers tend to use income increasing tactics when there are interested in enacting strategic changes.

In fact, it has been shown that most financial users tend to believe that any income increasing measure enacted by their managers is in close relation to the overall nature of these kinds of objectives. In other words, employees are less likely to be influenced by positive or income increasing accounting decisions than by income decreasing accounting decisions. When managers opt to increase their income, chances are that employees may assume that this is part of a strategy to reach an industry benchmark. Consequently, they are less likely to believe it.

On the other hand, when managers make accounting decisions to decrease their overall incomes in their financial statements, then employees are much more likely to believe the latter results than if incomes had been increased. This is largely because such employees may assume that the reflections being put out by their employers have been one in order to reflect the economic situations prevailing at that time. In other words, it may be necessary for firms to prepare for skepticism in the former case than in the latter one.

In close relation to income decreasing or income decreasing acts in financial statements is the issue of qualification in making accounting decisions. Users are likely to regard qualified income reducing acts as being more strategic in nature than unqualified income decreasing acts. This is the case because when the acts are qualified, then chances are that the users would asses the firm in a more positive light than if the financial statement had not been qualified.

There is a need to compare financial statement user reaction to income increasing and income decreasing changes in comparison to reference point. Usually, most firms do not operate in isolation. Employees are well aware of the goings on within their industries. Consequently, when accounting decisions are made to either increase or decrease incomes within corporations, employees or other users tend to resort to reference points such industry benchmarks to see how far below the mark they are or how far above it they have reached. (Proell, 2008)

Statistics indicate that users react more positively to income decreasing changes even when comparing them to industry benchmarks. This is usually because most people may treat this as being representative of occurrences within the industry under consideration and therefore leaving room for growth.
On the other hand, when incomes are perceived as being way above industry benchmarks, then users are likely to assume that those benchmarks do not represent the goings on their particular industry. This means that they may treat such a change as being deviant from the norm. Because of this, users may assume that such a firm cannot survive within its industry of operation and that the assessment of that firms performance is therefore below par in reality.

Financial statement users are likely to remain indifferent to changes made by their employees in the event that the accounting decision is an income decreasing one but a qualified one. This is largely because users are likely to attribute such changes to either strategic reason or to reflect economic conditions within a certain industry. This means that those changes may indicate the overall problems facing these groups when it comes to the process of enacting these changes.

Income increasing acts may also solicit different reactions in the vent that they have been qualified or if they are not qualified. Expert opinion suggests that financial statement users are much more likely to believe them if they are qualified.

In the agency theory, firms are treated as a point of convergence of contracts. This means that a number of users of financial statements view accounting choices as means against which firms can get incentives. The incentives are important determinants in the process of making accounting decisions largely because they can make the difference between the detriment or survival of a number of corporations.

Healthy and financial firms often find that they have to make accounting decisions. However, the forces or determinants affecting these two types of firms are dependent on the kind of arrangement being made. In certain reviews, some analysts have assumed that the type of incentives facing these two types of firms is the same. However, this may not necessarily be true because financially distressed firms may be challenged to engage in certain contracts depending on the type of benefits that they may derive from certain contract incentives. (Proell, 2008)

One of the drivers of accounting decisions in financially distressed firms is the issue of debt covenant isolation. Financial debts are a particularly pressing issue for such firms and it is likely that their accounting choices can be adversely affected by these decisions and vice versa (that the accounting choices they make can change their prevailing situations)

In other circumstances, firms facing financial distress may be motivated to make accounting decision that can subsequently affect their jobs or their firms altogether. In other words, some troubled firms may consider their situations as being temporary. This means that their greatest concerns may not be to get accounting bonuses. Instead, their focus may be on restoring the financial position of their firms and making the most of their kind of arrangements.

It has also been shown in a number of researches that new CEO tend to deflate their incomes when accompany has been recording poor financial management during the previous year. This is an aspect that has been carried forward in a number of companies that may be considered as financially troubled ones.
It should also be noted that accounting decisions in the latter category may also made in order o reduce incomes. This creates an image of a corporation that is vulnerable.

In this regard, such firms are likely to obtain concession from the government through government subsidies or they may find that labor unions offering incentives to poorly performing firms my be motivated to consider them if they record lower incomes. In other words, it can be said that such firms may make be affected positively by such decisions since they may gain favor from the government or from labor unions. On the other hand, if these income deflations are discovered, then a financially distressed firm may be required to close. (Riper, 2006)

In other circumstances, forms undergoing financial distress may be motivated to make accounting decisions in order to cope with management changes that may have occurred at the time. This is usually the case when the incumbent management finds that the new firm he or she is operating is dealing with lower performance than was the case in the previous regime. Such mangers may be interested in displaying positive light to internal and external stakeholders of the company under consideration.

In other situations, it may be possible to find that other firms are undergoing government assistance investigations. These are usually those firms that are in a position of getting incentives from the government if it found that their management principles are in order. Usually, such firms are likely to make accounting decisions that would affect them in a positive light by making them liable to receive incentives from the investigators.

In other researches, it has been found that firms facing financial difficulties may be required to deal with large accrual especially during their first year in dividend reductions. This means that a firm may be faced with more than one particular financial challenge at a time.

With regard to accounting decisions and the effect that the choices have on financial statement users; a number of researches have also been done on the user expectations. In other words, this is another factor that can affect the overall decision made by a certain corporation and how the users within that firm are affected by it. For instance, one is likely to find that within certain forms, the users under consideration have very little regard for the kind of decisions that they may be making because of the fact that there may be a match between their expectations and actual occurrences. However, in instances where financial statement user expectations are quite varied from actual occurrences, then it is likely that these issues may not affect them positively. (Belkaoui, 2007)

Risk management has also been shown as an important predictor of accounting choices and hence highly influential in determining some of the effects of these choices. This is largely because financial statements have a shocking effect on users when the information being displayed is included.

Risk management sis usually something that may be firm specific mostly because different companies are faced with different obstacles at any one time. For instance, when a company was faced with a number of security risks, then chances were that they would classify those security risks in manner that would portray them in a positive light. Additionally, benchmarks set up in accounting standards were highly influential in determining whether certain issues were considered as security risks or whether they were not. This means those weaker banks are much more likely to treat fewer securities as being lower than the accounting benchmark than vive versa.

Interest risks that come with securities are also an important factor in determining effects of such accounting decisions. This is because levels of interest risks on a certain bank portfolio can go up depending on how that particular issue had been classified by the parties involved in the preparation of the financial statements (Warfield, 2008)

Research has also shown that there are also other factors that may affect financial decisions being made by respective individuals in terms of the perceived expectations and actual occurrences.
Current GAAP

Financial statement users are adversely affected by the accounting choices made within certain firms. One such group are financial investors. Research has shown that the manner in which financial statements are presented to non processional financial statement users such as investors has a very important role to play in influencing their choice to invest in that respective firm. When a firm opts to make an accounting decisions in which there it highlights the effects of a net income on the goings on within a certain firm, then chances are that one might have to deal with these scenarios in a relatively different manner. In other words, an investor may make the choice to invest in such a firm if the information given is forthcoming in this regard.

The converse is as true, when accounting decision are made such that investors have now ay way of understanding the fair value that they have on a particular investment, then chances are that that group may be persuaded to look elsewhere for investment. Usually, information about financial statement interpretation can be done on the same document but as a note or on the margin of the financial statement. Consequently, firms that may be in unhealthy situations may be affected positively by making such an accounting choice. On the other hand, failure to make such a decision may also influence them negatively owing to the reduced level of awareness given to these kinds of approaches. (Warfield, 2008)

It should b noted that a number of financial statement users are highly affected by the accounting policies in certain firms or the level o adoption of accounting standards. This is usually the case when considering foreign investment. In other words, there are situations in which a certain investor may be dealing with the issues surrounding that particular scenario especially with regard to the kind of changes affecting a certain party.

An example of how this can be displayed is through looking at the relationship between two countries such as the US and Australia. It is likely that a US foreign investor will be more interested in making investments within countries that are US GAAP aligned. This factor is quite important in accounting decisions and hence accounting effects because only has to look at accounting policies of a number of developed nations to understand this. The US is one of the heaviest foreign investors in Australia. In order to appeal to the latter group, it was found that Australian accounting standards took a turn and began conforming to the US institutional frameworks and also to their GAAP.

There are a number of reasons identified in literature for selecting certain accounting choices and these reason include:

Improves financial statement credibility
Reduces processing costs

When accounting policies are voluntarily done in order to come up with the most influential choices on foreign ownership, then chances are that they can attract greater investments if they are aligned to the foreign investors institutional holdings or if they are also associated with the joint determinants under consideration.

The following table illustrates the example of US foreign investors interested in Australian companies

VariablesStatisticCompanies with US investmentsCompanies matched by size and industryp-value
Total assetsMean
Median
24,157
2, 8903, 924
525

Self Employed Accounting Software Review And Importance

The best choice is often dependent upon the size of the business and the employment of full time accountants, accounting staff, bookkeepers or management of the accounting records by the proprietor. Every business needs to choose the most appropriate accounts package according to both the requirements of the business and the capabilities of the person or people who will operate the accounting solution.

Many small businesses do not benefit from sophisticated accounting software if the technical requirements of that software exceed the abilities of the users to produce efficient financial records and use the full capabilities of the accounting software to maintain a high level of financial control.

Alternatively a simple bookkeeping package may not offer the degree of financial control over such financial matters as debtors and credit control, creditors and cash flow liquidity that may be required. Financial control and cash flow is of supreme significance and importance when credit is tight.

Every business needs to maintain a set of books and accounts to satisfy the legal obligations to calculate the net taxable profit which has to be both declared to the taxation authority and provide sufficient financial records to support that calculation.

Up until the mid twentieth century it was common practise to produce accounts handwritten on paper, Typing being reserved for the final set of accounts for publication as required. Handwritten accounting records are largely obsolete for medium and larger businesses although still used by many small business organisations.

With the advent of computers accounting software has become the norm and there are many simple bookkeeping packages that can be easy to understand and offer sufficient levels of financial control for even the smallest business.

In essence each small business has a choice between preparing a handwritten set of accounts, using a simple bookkeeping package which could be based upon spreadsheets or a more sophisticated accounting software package that almost invariably use a data entry system into a database which can then be queried to produce the required financial control.

Choosing handwritten accounts would only be applicable to the smallest business where the proprietor had no employees, limited numbers of transactions and had full financial control without the need for written information. Such handwritten accounts would not be suitable for any business that required control over debtors and creditors or that needed to produce a balance sheet.

For those businesses that could suffice with handwritten accounts there are better options available such as using computer spreadsheets. Minimal knowledge would be required and the benefits substantial compared with being handwritten.

An accounting package based upon computer spreadsheets is suitable for most small business as it can be no more difficult than maintaining handwritten accounts but in an organised format. The sophistication of the format would be according to the ability of the designer of the accounting solution or the bookkeeping knowledge of the person preparing the accounts.

Accounting software written on computer spreadsheets have advantages in that they can save time in data entry, improve accuracy, can be changed to correct errors, highly visible and provide all the basic bookkeeping needs of a small business. Accounting solutions written on spreadsheets are normally limited in relation to financial control and medium sized businesses that require additional control over debtors and creditors may be more suited to a database accounting software system.

Generally if a business is large enough to employ a full time bookkeeper or accountant then that business potentially has the accounting knowledge and skills within the accounting function to use a database accounting system and achieve the additional financial control elements which become available.

Accounting software that uses a database has the facility to produce regular financial and tax reports, debtors reports and statements, creditors reports and statements, cash flow statements and a set of monthly and final accounting reports such as profit and loss accounts and balance sheets.

The disadvantage of such accounting solutions is that to get the most and best out of the system you also need to understand how the package works and how technically to obtain from it the benefits of increased financial control that are available.

The main priority in choosing any accounting package is to first determine the final requirements you need from that administrative system. If detailed financial control, particularly over individual supplier or client accounts is essential and the business is large enough to employ office based staff including an accountant or full time bookkeeper then a database system may be the appropriate choice.

If the business is smaller and requires detailed accounting records to support the year end financial statements while financial control is already sufficient to be in the hands of the business owner then accounting software based upon spreadsheets would probably be adequate. The degree of adequacy being dependent upon the level of expertise contained and automated within the accounts program.

Handwritten books would be the lowest choice. Adequate for some small businesses but only suitable if a computer based option was impossible.

How To Make Your Customers Pay On Time – Lessons From The Web Hosting Industry

opajfkwbefjPayment collections is always a hassle for any business offering goods or services. In most industries, once goods have been dispatched or services have been rendered, the entire control to recover the compensation slips out of the hands of the seller. Where goods are concerned, you can do nothing but send reminders to your customers about the outstanding payments. In case of services, once they are rendered and the payment is in default, usually you may refuse to provide services in future unless the money is paid. Recurring services are at a bigger advantage since stoppage of services in future can be used to recover past debts. The telecommunications sector has a more significant advantage when it comes to recovery of dues.

Eg: Upon non-payment of a phone bill, the phone company can just disconnect your phone line from their end. They may also insist that you pre-pay for your connection and deduct call charges from your pre-paid balance. .

The web hosting business also has a similar advantage. But mostly web hosts prefer to exercise restraint and resort to disconnection of services only as a last resort. This article highlights some key points which can be helpful to ensure that your business remains financially healthy and your cash flow is not held up by errant customers.

Incentive

Many electricity companies offer a discount of up to 5% if you pay promptly i.e. within 5 – 6 days of the bill date. This encourages customers to pay promptly and helps the electricity company advance its payments to maintain its cash flow. The incentive discount is adjusted against the next bill and mentally pleases the customer.

Penalty

Phone companies prefer the “stick” approach and impose a fine or penalty on late payments. Payments after the due date may also attract an additional interest on the unpaid amount. The bill clearly mentions what the amount will be after the due date. This acts as a deterrent to customers planning to procrastinate the payments.

Payment Options

Offering an installment system or offering Credit Card payments is also an option to ensure that you get paid. Payments by credit card are safer for the seller, as it puts the burden of recovery onto the banks or credit card companies. However, one must note that for taking on this burden, banks charge between 1% to 5% of the transaction amount. Monthly installments are also a good option for small clients or persons who are struggling with their cash flow themselves.

Automation

Automated billing systems allow you to invoice your customers, collect online payments and also send out reminders without any human intervention. This enables the business to be paid promptly and avoids delays due to human error of the staff or employees. These systems also offer automated Credit Card handling and charge the credit cards automatically on the due date. Investing in such a system is beneficial to the client as well as the seller, since both have an online system which is accessible 24 x 7.

Reminder services

For those who don’t want to invest in a full-fledged billing system can also use online reminder systems. Services like “Monkey On (your back)” allow you to set up reminders which will keep prodding your customers into making payments. Though this option is a bit informal, it allows you to constantly prod your lazy customers into paying their dues.

Web hosting providers also have an option to suspend or terminate the customers account upon non payment. Suspension allows the user’s files to remain on the server in a frozen state. The account becomes inaccessible and a message appears on their website, stating that the account has been suspended. Termination is a more drastic step i.e. it wipes out all the customers information from the server. This means that as an after thought if the client decides to pay, even if he renews his account, he will not get his previous data back. he will have to start from scratch or restore his site from a previous backup.

Most web hosts are compassionate and understanding and offer grace days, before the account is terminated. However, with the current economic situation globally, they too are under a lot of pressure to maintain financial stability.

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