Question Tag: Users of financial statements

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  • 5 Marks

PSAF – Nov 2023 – L2 – Q5c – Financial statements discussion and analysis

Explain the objectives of financial reporting in the public sector and its usefulness to primary users.

Financial reporting is not an end in itself but a means to an end. The end game of financial reporting is to provide value to the user of the information. In the local government, financial reporting must deliver the expected value to the users.
i) Explain the objective of financial reporting in the public sector.
ii) Explain the usefulness of financial statements of a Metropolitan Assembly to three of its primary users of the information.

i) The objective of financial reporting in the public sector is to provide useful information for accountability and decision-making purposes. Thus, financial reporting is concerned with the provision of financial information that supports the accountability and decision-making needs of the users. In terms of accountability, financial statements serve as a source of information to the users to assess how well the reporting entity applied the resources entrusted to it in the delivery of public value. It enables the users to question the public managers on the use of public resources. Thus, financial statements serve as a tool for demonstrating and assessing accountability of public institutions and their managers. Financial statements also provide information that supports decision-making in the public sector by both the public managers and the users. For example, the decision relating to the allocation of resources is supported by the accounting data. Similarly, the information on the financial performance and propriety of an entity may influence the decision to re-elect the managers of the entities in a democratic context.
(2 marks)

ii) Primary users of financial information of an Assembly include:

  • Local citizens
  • Assembly members (representatives)
  • Central government
  • Rate payers
  • Lenders
  • Donors

Local citizens are service recipients of the local government and therefore may need the financial information to assess:

  • The cost of services provided by the Assembly and the sustainability of the service provided.
  • The accountability of the local managers in terms of how well the resources are used.

Assembly members are representatives of the local citizens in the governance of the Assembly and therefore they need the information to assess:

  • Whether there is compliance with the legally adopted budget of the Assembly.
  • The performance of the programs and projects of the Assembly.
  • Accountability of the local managers.

Central government transfers resources to the Assembly and also grants it the enabling law to operate. Thus, the government needs the financial information to exert accountability in the Assembly and also to make decisions relating to resource allocation.

Rate payers are providers of financial resources to the Assembly and may desire to know how well their rates have been used to provide local services.

Lenders like banks use the financial statements in determining the financial condition of the Assembly to decide whether to lend or not.

Donors support the Assembly with financial and non-financial resources and therefore need the financial statements to assess accountability for the donor and compliance with donor agreements.

(Any 3 points @ 1 mark each = 3 marks)

  • 20 Marks

FA – May 2021 – L1 – Q1 – Non-current assets and depreciation | The IASB’s Conceptual Framework

Explanation of stakeholders' interest in financial statements and preparation of a schedule for non-current assets with depreciation and revaluation adjustments.

a) Explain why each of the following would be interested in the published financial statements of a company.
i) Shareholders
ii) Lenders
iii) Customers
iv) Suppliers
v) Financial analysts and advisers
(10 marks)

b) The following details were taken from the books of Suban Ltd for the year ended 31 July 2020.
i) Tangible non-current assets at cost as at 1 August 2019 were:

Item Amount (GH¢)
Land and Buildings (Land GH¢120,000) 520,000
Motor Vehicles 310,000
Equipment 115,000

ii) Accumulated depreciation as at 1 August 2019:

Item Amount (GH¢)
Land and Buildings 75,000
Motor Vehicles 110,000
Equipment 40,000

Suban Ltd depreciates non-current assets as follows:

  • Buildings: 3% per annum on cost.
  • Motor vehicles: 20% per annum reducing balance basis.
  • Equipment: 10% per annum on cost.
    Depreciation is charged for each month of ownership.

iii) On 1 October 2019, Land was revalued at GH¢200,000.
iv) A Motor Vehicle purchased on 1 May 2018 for GH¢40,000 was sold on 1 February 2020.
v) All equipment as at 1 August 2019 had been purchased after 1 February 2013, except for one equipment which cost GH¢10,000 purchased on 1 August 2008.
vi) During the year, the following assets were purchased:

  • Motor vehicles GH¢35,000 on 1 November 2019.
  • Equipment GH¢20,000 on 1 February 2020.

Required:
Prepare the Schedule of Non-Current Assets for the year ended 31 July 2020.
(10 marks)

a)
i) Shareholders
Shareholders, the business owners, will want to assess how effectively management is performing its stewardship function. In addition, they will want to know how profitably management is running the business and how much profit they can afford to withdraw as dividends.

ii) Lenders
These consist of debenture holders, banks, and other financial institutions. They are interested in information that enables them to determine whether their loans and the interest attached to them will be paid when due.

iii) Customers
Customers are interested in information about the continuance of the business, especially if they have bought goods with guarantees etc. If the business is a major supplier of goods, they will wish to know that it will continue into the future.

iv) Suppliers
These are people the business owes money to. They are interested in information that enables them to determine whether amounts owing to them will be paid when due. Many suppliers will also be interested in the long-term survival of the business if the business is their major customer.

v) Financial Analysts and Advisers
They need information for their clients or audience. For example, stockbrokers will need the information to advise investors in stocks and shares; credit agencies will want the information to advise potential suppliers of goods to the business, and journalists need information for their reading public.

(Each point @ 2 marks = 10 marks)

b)
Suban Ltd
Schedule of Non-Current Assets for the year ended 31 July 2020

Item Land and Buildings (GH¢) Motor Vehicles (GH¢) Equipment (GH¢)
Cost as at 1 August 2019 520,000 310,000 115,000
Additions – 35,000 20,000
Disposals – (40,000) –
Revaluations 80,000 – –
Cost as at 31 July 2020 600,000 305,000 135,000
Accumulated Depreciation as at 1 August 2019 75,000 110,000 40,000
Profit and Loss (W1, W3, W4) 12,000 42,210 11,500
Disposals (W2) – (12,640) –
Accumulated Depreciation as at 31 July 2020 87,000 139,570 51,500
Net Book Value as at 31 July 2020 513,000 165,430 83,500

Workings:

  1. (520,000 – 120,000) x 3% = 12,000
  2. Accumulated depreciation of motor vehicle disposed of:
    a. 40,000 x 20% x 3/12 + (40,000 – 2,000) x 20% + (40,000 – 2,000 – 7,600) x 20% x 6/12
    = 2,000 + 7,600 + 3,040 = 12,640.
  3. (270,000 – (110,000 – 9,600)) x 20% + (40,000 – 9,600) x 20% x 6/12 + 35,000 x 20% x 9/12 = 33,920 + 3,040 + 5,250 = 42,210.
  4. (115,000 – 10,000) x 10% + 20,000 x 10% x 6/12 = 10,500 + 1,000 = 11,500

(10 marks evenly spread using ticks)

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