GRAPH USE IN FINANCIAL REPORTS Essay Example

Financial reporting has numerous objectives in accounting. It provides information useful in making investment and credit decisions. The main objective of doing general purpose financial report is to present potential and the current investors and creditors with vital information on credits and similar resource allocation decisions. It provides information on buying, selling or holding equity and providing loans or other forms of credit. Financial report gives information useful in assessing cash flow prospects. Information from reports should help current and potential investors and creditors and others to assess the timing, amount and uncertainty of the firm’s future cash inflows and outflows. This information will help them know the ability of the firm to provide returns to investors and creditors. Financial report provides information about a firm’s resources, changes in the resources and claims to those resources. For the investors and creditors, information on effects of transactions and other happenings that alter resource and claims to them is useful (De Franco et al, 2011).

Graphs are now greatly preferred to present financial information in the developed western countries. Beattie & Jones [2001] demonstrates that Australia, France, Germany, Netherlands, UK and USA’s top companies use graphs in their annual reports. Earlier, using graphs in financial reporting had little attention yet they represent an integral part of a firm’s strategy. This research has been supported by several conducted studies. Companies prefer using financial graphs to tables or narratives. Information on a financial report has to attain qualitative characteristics. Comparability is among them which calls for a firm’s information on reporting entity should be comparable with information from other entities. Verifiability calls for faithful representation of information in books of accounts. Timeliness which means that information should be availed to the decision makers on time so as to be used in making financial decisions. Understandability is about classifying and presenting information clearly and concisely so make it easy to understand.

Companies prefer using financial graphs instead of using tables for it has several positive reasons. Graphs allow flexible presentation of information by the management since mainly information in annual reports is made by a regulatory framework. Graphs are also good at summarizing, communicating and distilling financial information. This enhances understandability. They are excellent at patterns and highlighting differences and conveying trend information (Korol, 1986; Harris, 1996). The use of graphs in financial reporting is however not challenging free. Though use of graphs has numerous positive results, there are several negative ones. Among them is management however uses graphs to serve managerial interests rather than user interests. The message conveyed is no longer neutral and is also biased. This remains to be greatest challenge facing use of graphs in financial reporting. This is self-serving reason for graph use. Additionally effectiveness in communication of graph is dependent on the graphical competency of the user and the preparer. There are numerous graph construction and designs which can be varied and may affect the user’s perception.

Financial reports are useful to owners and managers since it provides financial information important in making important business decisions affecting the company’s operations. The reports help the management understand the firm better from the reported figures. The employees need this report in making bargaining agreement with the management on their salary increments, compensation, promotions and rankings. Prospective investors use financial reports to gauge the viability of investing in a business. This is important in helping them make investment decision. Financial institutions e.g. banks and other lending companies use financial reports in deciding whether to lend the company a loan or extend the debt payment period. The government use financial report to know the income of a company and thus the amount of tax to be paid by the firm.

In conclusion graphs enhance effective communication rather than giving financial report alone and are a means of representing financial information which had not been explored before. It is evident that graphs are now widely used in presenting financial reports in the modern accounting. Graphs are a good way to present accounting information since they are understandable and easy to interpret by the economic users. The greatest challenge that should be looked into is that graphs are being used by management for self-motives.

References

Beattie, V.A. and M.J. Jones (1992). The Communication of Information using Graphs in Corporate Annual Reports, Certified Research Report 31, Chartered Association of Certified Accountants, Certified Accountants Educational Trust.

De Franco, G., Kothari, S. P., & Verdi, R. S. (2011). . Journal of Accounting Research, The benefits of financial statement comparability.

Korol, J. K. (1986). Georgia Journal of Accounting, Graphical perception and the representation of financial information.