Issues in Financial Reporting

Final Exam

Muhammad Fahim

Sap Id: 23818

Dated: 24-June-2021

Solution Question no 01:

Significant Accounting Estimates and Error

Manager of Sugar Mills And industries has made significant accounting estimates and
adjustments. But the problem occurred in this scenario is he is not finance educated, he faced the
problem and he is confused that why management uses estimates instead of facts.

Following Reasons are as follow…………

1. Financial statements constitute a high-quality source of facts for company's financial

position and commercial enterprise overall performance evaluation. Management
judgment depends on the facts base that's given on the time of judgment. Each judgment
is by way of its nature subjective, so the consequences of the estimation can differ. Non-
present day tangible and intangible property represents a extensive proportion of property
of many organizations. There is a mass of space for making use of accounting estimates
which will understand and measure such assets. An accounting estimate is a dimension
 or reputation in the financial statements of or a choice to not recognize an account,
disclosure, transaction, or occasion that normally involves subjective assumptions and
measurement uncertainty. For functions of this standard, a truthful price measurement is a
form of accounting estimate.
2. The goal of the auditor is to acquire sufficient suitable evidence to decide whether
accounting estimates in large money owed and disclosures are nicely accounted for and
disclosed within the economic statements. Testing the agency's method includes acting
procedures to test and examine the methods, statistics, and huge assumptions used in
developing the estimate, with the intention to form a conclusion about whether or not the
estimate is properly accounted for and disclosed inside the financial statements.
3. Management is chargeable for making the accounting estimates included inside the
monetary statements. Estimates are based totally on subjective in addition to objective
factors and, as a end result, judgment is required to estimate an amount on the date of the
economic statements. Management's judgments are typically based totally on its
knowledge and enjoy approximately beyond and current events and its assumptions
approximately conditions it expects to exist and publications of motion it expects to take.

Uses of Estimates and Judgments:

The instruction of the consolidated monetary statements in conformity with IFRS calls for
control to make judgments, estimates and assumptions that have an effect on the software of
accounting guidelines and the reported amounts of assets, liabilities, sales and fees. Actual
results may additionally fluctuate from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to

accounting estimates are identified in the period in which the estimates are revised and in any
future period affected.
 Conclusion!

Hence, it is concluded that, these were the basic reason why management uses judgment instead
of facts. Information approximately critical judgments in making use of the accounting
guidelines that have the maximum sizable effect at the amounts identified within the
consolidated monetary statements are discussed underneath. Further info of the character of these
judgments, estimates and assumptions may be observed within the relevant notes to the
consolidated economic statements.

Solution Question no 2 :

Income smoothing………………?

Income Smoothing

Income smoothing uses accounting techniques to degree out fluctuations in internet earnings
from one period to the subsequent. Companies bask in this exercise because buyers are typically
inclined to pay a top class for shares with consistent and predictable income streams rather than
shares whose earnings are difficulty to more volatile styles, which may be seemed as riskier. The
intention of profits smoothing is to lessen the fluctuations in earnings from one duration to any
other to painting an organization as though it has consistent profits. It's meant to clean out
durations of excessive profits vs. Periods of low profits or periods with high fees vs. Periods of
low prices. There are following reasons of Income smoothing are as follow.

 Reduce Taxes
 Attract Investors
 Business Strategy

Different Phenomenon in Income Smoothing:

According to International accounting standards, the procedure of earnings smoothing isn't

always criminal as it uses false accounting techniques and interpretations to stabilize fluctuations
in internet profits. When corporations do earnings smoothing, there is no correct records to
determine their actual income formerly to keep away from taxes. Income smoothing being a
topic discussed for decades raising the topic of whether it's ethical or no longer.

The general public preserve that manipulating incomes reduces the critical components of
financial reports and greater so the accounting concepts. It requires the modification to improve
the monetary statements transparency so as for the involved to take a look at the real numbers for
his or her selection making.

Solution Question no 03:

Evolution of Basic cash accounting…………..?

The goal of business monetary reporting is to offer facts this is beneficial for making enterprise
and economic decisions. The cash basis of Accounting recognizes transactions and events when
cash is received or paid by the entity. Financial statement are prepared under the cash basis
provide reader with the information about the sources of cash raised during the period, the
purposes for which cash was used and the cash balances at the reporting date. The measurement
focus in the financial statements is balances of cash and changes therein. Notes to the financial
statement may provide additional Information. Early histories of business identify the
bookkeeper as a precious personnel member. As businesses have become greater complicated,
the want for greater astute evaluate and interpretation of monetary statistics was met with the
improvement of a new career public accounting. Modem accounting is not an in a single day end
result of an unexpected trade in any event. It has reached the prevailing stage via an evolutionary
system of heaps of years. Since the beginning of human civilization accounting exercise has been
occurring and its ahead march will retain. For the need of its software Accounting has gradually
been changed and similarly evolved. Shareholders are within the dark Shareholders are normally
unaware that financial statements are inaccurate. Only aware in limited instances When a third
party has a vested interest in revealing detrimental facts following a takeover, or When a
corporation falls into the fingers of an administrator, inspector or liquidator, whose duty it is to
investigate and file on shortcomings inside the management of a agency. Progress toward
adoption by using America of International standards since 2002, there has been collaboration
among the Financial Accounting Standards Board (FASB) and the IASB to the development of
top notch, compatible accounting standards that could be used for each domestic and cross-
border economic reporting. So, with the increasing in the need of technology standards develop
different standards and create financial reporting standards with the help of evolution.

Solution Question no 04:

Language……………..?

It is true that Language plays an important role in the creation of meaning and the Construction
of knowledge. A language-sport is a philosophical idea evolved via Ludwig Wittgenstein,
regarding easy examples of language use and the moves into which the language is woven.
Wittgenstein argued that a word or even a sentence has which means best as a result of the "rule"
of the "game" being performed. Depending on the context, as an instance, the utterance "Water!"
might be an order, the solution to a query, or some other form of conversation. If we see this
concept in accordance with financial reporting framework we concluded that it really affect what
people see, how they see it and how they will interpret that particular thing. We know that
everyone has their own perception and thinking patterns, it depends how person see and what he
really interprets.

Financial reporting is a language, just like German or English. It is the language that companies
use to talk to investors. It is the language that investors use to ascertain value. It is what people
use every day to decide where to invest their hard earned dollars for financial security and future
opportunity. The global has modified lots because the (then) chairman of America Securities
and Exchange Commission Arthur Levitt uttered these words in the course of a speech in 1999,
however they are no less genuine these days than they had been then. Like any profession,
accountancy has its own collection of abbreviations, acronyms, and professional words and
phrases, that can confuse outsiders and newcomers, and the region of monetary reporting is not
any exception. It concluded that Language should be very efficient and reliable, that another
person easily understands what other person is presenting and what would be the interpretation
of that particular thing.

Solution Question no 05:

Professionalism and Accounting Rules………..?

I agreed with the author, reason is the recent records of accounting encompassing the remaining
3 a long time in specific which has been marked with the aid of the rapid and persevering with
promulgation of accounting requirements and other technical regulatory statements. There is a
large perception that those accounting guidelines are essential to improve the great of accounting
records and had been effective in attaining that give up. In evaluation, the crucial topic of this
examine is that this preoccupation with accounting rule-making and rule-compliance has
distracted interest from the crucial criterion of ‘exceptional’ in financial reporting. . Compliance
with rules per se is not what determines the reliability and usefulness of accounting information.
The essential criterion of quality in accounting abides in the very meaning of the word itself. To
provide an account of an event or circumstance is to describe that event or circumstance. A
reliable and objectively useful account will be characterized by a correspondence between the
description and the event or circumstance it purports to describe.1 Correspondence with
commercial phenomena is the determinant of the serviceability of financial reports. Compliance
with accounting rules is only functional to the extent that it enables such correspondence. To
elevate rule compliance to the apex of accounting as is now common in accounting practice,
discourse and education is to elevate the means over the end they purport to serve; to privilege
process over purpose. Specifications of the characteristic of accounting mirror this distinction.
Rather than emphasizing compliance with prescribed strategies, the characteristic of financial
accounting is stated to subsist in ascertaining the dated, economic magnitudes of the elements of
economic position and performance of companies and speaking them to interested parties for the
reason of informing resource allocation selections and responsibility reviews.

Accounting career is beset through an inferior and incomplete belief of nice in its paintings,
emphasizing most effective compliance with processing rules in preference to the
correspondence with industrial phenomena essential to make accounting information a reliable
manual for monetary choice making. It is revealed that the discourse of accounting researchers is
essentially unconcerned with enhancing the technical first-class of economic statements and that
the emphasis in accounting training is on in reality the mastery of a rule-e book. Accounting
practice itself has degenerated into a ritual of rule-compliance. Building from a consideration of
the function of accounting, the character, roles and duties of professions, and the features and
effects of accounting rules, its miles concluded that the expert warrant of the accounting career
stays to be tested through the cognitive authority anticipated of an expert career.