To what extent are a company's annual report and accounts useful in Essay - 1

To what extent are a company's annual report and accounts useful in understanding and analysing its market, productive and fi - Essay Example Other than the owners, there are other internal and external parties who need to study final reports and accounts of a business like the management body, investors, creditors, government agencies, labour unions and tax authorities. This paper discusses the usefulness of annual reports in understanding a company’s market, production and financial performances. Rules of accounts The final reports and accounts of a business enterprise are prepared by the directors whose primary responsibility is to provide a â€Å"true and fair view of the state of the company’s financial position and results†2 at the end of a financial year. In every country there is the Companies Act that provides directions, rules and regulations regarding the format and content of the final accounts that need to be strictly followed. The final reports and accounts are comprised of profit and loss account, balance sheet, cash flow statement, statement of total recognised profit and loss, note on historical cost profit and losses, activities done with funds of the shareholders, notes to the accounts.3 Together these form the financial statements of a business enterprise and they reflect the strength of market relationship, productivity and financial position of the business, and whether it has the ability to sustain and develop in the competitive market in the long run. The profit and loss account which is also known as the income statement provides a summary of the activities of a business and the financial achievements in a particular financial year. It provides information about the â€Å"sales or turnover, operating expenses, exceptional items, interest payments, taxation charges and dividends paid and proposed.†4 Although the profit and loss is prepared in a prescribed format, it is designed in a manner that meets the information needs of the management.5 An example of a published profit and loss account of Pickers PLC is shown in Fig.1. Fig.1: Profit and loss ac count for the year ended 31 March 2003 ?000s ?000s Turnover 20,300 Cost of sales (13,850) Gross profit (or loss) 6,450 Distribution costs (2,314) Administration expenses (1,424) (3,738) Operating profit 2,712 Income from other fixed asset assessment investments 125 2,837 Interest payable and similar charges (813) Profit (or loss) on ordinary activities before taxation 2,024 Users of accounts The main purpose of financial statements is to â€Å"reveal the results and financial position of the business.† For this purpose in every business organization final accounts are prepared at the end of every financial year.6 In a business enterprise, it is not only the owners, shareholders or the management body who need to study the final reports and accounts but there are other internal and external parties who have equal rights to know about the financial condition and stability of the company for variable reasons. These parties are investors, employees, lenders, suppliers and other c reditors, customers, government and their agencies, and the public. Investors are those people or organizations that take risks by investing their monies to buy shares of a company. In