Financial statements have many uses and objectives in that it can "communicate financial information about an entity to permit informed judgements and decisions by users of the information" (American Accounting Association).

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Daniel Mensah

“The objective of financial statements is to provide information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for assessing the stewardship of the entity’s management and for making economic decisions”.

Financial statements have many uses and objectives in that it can “communicate financial information about an entity to permit informed judgements and decisions by users of the information” (American Accounting Association). The ASB’s statement of principles for financial reporting echoes this statement, and also emphasises the point that financial statements are also useful to analyse an entity’s financial performance and position, through profit and loss accounts, and an entity’s balance sheet. The uses and objective of financial statements do not stop here – they can be used by management for decision making, stewardship, predictions of the future based on past results, and for some entity’s it is a legal requirement to produce annual reports according to the Company Act 1985.

        Financial reports, such as those released by Sainsbury’s Plc on an annual basis, also have a wide and diverse range of users. A main user of financial statements is the management of Sainsbury’s Plc. The term ‘management’ is very broad and could refer to management at the level of managers in the entity’s stores. Or it could refer to the management of Sainsbury’s at board level, such as the firm’s Board of Directors. The information provided in the accounts of the business needs to presented in a way that is clear, easy to understand, but not neglecting the need for the information within the statement to be of the highest standard. The firm’s financial performance and position is shown through the profit and loss accounts and balance sheet statements in Sainsbury’s annual report. The report shows the profit and loss account for the 52 weeks to 30th March 2002 and then compares that, to the previous 52-week period before that. In this way it provides management a picture of the firms financial performance and also a comparison to compare this periods performance compared to the period before. The accounts show that the firms retained profit for the period ending 30th March 2002 is £79 million, compared to the previous period of £2 million – an increase in profits of 3850%. Similarly, the balance sheet compares the firm’s financial position at 30th March 2002 and 31st March 2001. So from this the statements have fulfilled its objective to show the firms financial performance. However, a lot more could be added to the profit and loss statement to fully meet the objective of assessing the stewardship of the entity’s management and for making economic decisions.

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A 3850% increase in profits may look good to managers, but the statements do not compare the firm’s profits with other rival companies such as Tesco’s. So where the managers may think that the rise in profits means that they are doing very well, they may find that the profits of Tesco’s exceeds Sainsbury’s which may not be what the management want to see. If this were the case then they would use the data as a catalyst to do something to improve the firm’s profits, to surpass Tesco’s or any other rivals. Both the profit and loss and ...

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