Users Of Accounting Information

PART A

Lenders have no use for the Income statement and the Balance sheet with information relating to past transactions or events for making decisions unless they are accurate.

The Balance sheet is a “statement at one point in time, which shows all the resources controlled by the entity and all the obligations due by the entity.” (Bazely, 2007, p90) Hence it merely provides an outline of the financial strength and asset liquidity of an entity.

The Income statement “summarizes certain transactions that take place during a period of time.” (Bazely, 2007, p125) Hence the income statement provides some of the basic financial information for rational decisions to be made.

Lenders are “people and organizations who lend money in order to earn a return on that money.” (Bazely, 2007, p8) Therefore they are interested in ensuring whether the entity is going to provide with a return due to the entity making sufficient profit.

Therefore even if the balance sheet and income statement provides financial information relating to past transactions or events, lenders will not include the balance sheet and income statement in making decisions as many limitations of these statements affect the decisions to be made.

Lenders are interested in the entities controlled resources and what it owes. Therefore the limitations of the balance sheet clearly affect the accuracy of the statement. These include: the representation of the position of an entity at one particular point. The statement is only relevant at that particular point in time; the utility of the statement diminishes as time passes for providing relevant measures of assets and liabilities of an entity as the values assigned are usually historical cost; and, the valuation method of assets need to be appropriately measured as certain cases lead to an incorrectly stated figure.

Lenders use a variety of approaches to arrive at a lending decision. Therefore the accuracy of the income statement limits the decisions made by lenders. First, the organizational structure, size and type of activity limit the accuracy of the statement as it affects what is being reported and how it should be reported which may omit certain important aspects of the organization. Second, the income statement is normally prepared for internal use by an organization with which these internal reports are generally more detailed than the reports produced for external users, limiting sufficient accuracy of information needed to make a decision.

Even though companies develop balance sheets and income statements they are mainly for internal use. Many lenders do not include these reports for making decisions because of the many underlining limitations for accuracy in the reports.

PART B

A stock broking firm does not include a new computer system worth $12,000 as an expense on the income statement as it fails to satisfy the recognition criteria of the AASB Framework of a decrease in future economic benefit. Therefore the new computer system is recognized as an asset as it satisfies both definition and recognition criteria of the AASB Framework.

As stated in the AASB Framework an expense is defined as “decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity other than those relating to distributions to equity participants.” Consequently the definition of an expense must satisfy two characteristics. There must be: a reduction in assets or increase in liabilities apart from distributions to owners; and, a decrease in equity. As an item meets the definition of an expense,