ABSTRACT
In this paper, I discuss the relevancy and reliability of current financial Statements
prepared under the historic cost convention and following the accruals concept,
investigating the Strengths and weakness of the financial statements in providing “useful”
information to the users (Board OF Directors and Management of the Firm ,Shareholders,
Employees , Lenders ,Suppliers , Customers , Government , The public ) With theoretical
discussions and detailed analysis to the elements of the basic (3) Statements, Balance
Sheet , Profit and Loss , Cash flow , in terms of relevancy and to whom is it relevant , how
far can the figures support decision maker, also how far can these information represent
reality and if they can be manipulated to give different results which reflects total different
picture then reality presenting how reliable it is , also i will discuss the relation between
these statements if there is still a need for the current articulation specially between
Balance Sheet and P&L statements, I will support my discussion with references and
researches and articles from the internet also a real life cases to support my argue .
Introduction .
Board OF Directors and Management of the Firm ,Shareholders ,Employees , Lenders
,Suppliers , Customers are what a firm deals with in the day to day activates , it is a
business fact , when we say dealing , in my opinion , this means Requesting or Demanding
, Review Request and Approve, Action, Feedback on Action , for example if the
management of the firms decided to penetrate the market with new product that needs new
expansion that needs new investment a “œrequest will be forwarded to the Owners of the
Firm to “œdecide “œ to increase the investment , so a “œreview will be held and finally
“œapproval , now for the action , if the owners will decide to finance the new expansion
through a bank loan then a “œrequest “œ will be sent to the bank , the bank will “œreview
“œ and “œdecide to “œapprove the loan , the bank will feedback the firm board and
management with approval and terms and conditions for the loan .
Based on the previous business Demanding to Action cycles a set of financial reports that
present useful information to all the expected users when it comes to making a business
decision or a business review in this business cycles is very important, that is why
Financial Accounting Standard Board (FASB), agreed about standardizing a generic
purpose set of Financing reports that is useful to present and potential investors and
creditors and other users in Determining and predicting the balances and availability of
short-term financial resources, including cash, also Determining and predicting the cost of
Operation , Ability of the Firm or Business entity to generate Cash to meet it Obligations
(Current and Future ) , and may other measurement figures provided by these Financial
Statements.
Statement of Financial Accounting main objective is to provide useful decision-making
information for investors, creditors, and other users. These “Decision Usefulness” criteria
should be based on (2) main facts , which are Relevance and Reliability. The FASB defines
relevance of information as the information capability of making a difference in decisions
to predict, confirms or correct prior expectations. Reliability is defined as the ability to be
reasonably free of error and bias and to be represented faithfully ,As Stated in Leicester
Manual
“Relevance The information provided should satisfy the needs of the information users. In
the case of company accounts, clearly a wide range of information will be needed to
satisfy a wide range of users. What is relevant to one user for one purpose will be less
relevant to other users.”
Leicester,2.23
“Reliability Information will be more reliable if it is independently verified. The law
requires that the accounts published by limited companies should be verified by auditors,
who must be independent of the company and must hold an approved qualification.”
Leicester,2.24
GAAP financial reporting requirements tend to assure reliability over relevance. The
focusing on reliability resulted in ignorance of market value in financial reporting and
neglect to current economic reality of a firm. It is this relative emphasis that has caused so
much of the attention , which is the aim of this paper to investigate , as I will go through
the elements of the basic financial statements (Balance sheet , Profit and loss, Cash flow ) ,
Showing how relevant and how reliable is it with respect to the users who may need to
take a business decision (like a bank that will decide to lend the firm a loan ) , or a
business follow-up decision ( like board of directors either will need to check if the new
CEO and his senior management are doing a good job or not stewardship follow-up , or
will decide to release a new product ) .
Another very important area when evaluating the Financial statements in terms of
Relevancy and Reliability is the historic cost convention following the accruals concept
and it relation to the Current economic of the Firm investment , For example the Fixed
asset value is changed over the period that it was owned by the firm this means that the
historical cost of this asset in the annual balance sheets does not reflect it actual value , for
example real-estate prices (Lands , Buildings ..etc ) are subject to value change that is not
reflected in the Balance Sheet, same issue is related to the Current Asset (Goods in the
