Accountancy is the process of communication through which financial statements are prepared for use by both internal and external users says, William D King. The aim of this communication is to provide information that enables users to assess the entity’s ability to generate cash flows, fund current investments or meet future obligations. It helps stakeholders in making critical decisions about an organization’s future prospects based upon data provided in their financial statements.
Following are some key points that must be kept in mind while working on producing any type of accounting report:
– All information should be relevant and reliable.
– Information should be present clearly so that it can be easily understood by all concern parties.
– Information should not mislead the user in any way because it could result in bad decision-making by them.
– The information should provide a basis for making future projections.
This information can be present in the form of financial statements that consist of balance sheets, income statements,s, and cash flow statements.
While preparing these statements some key aspects have been considered as their influence on value is significant:
a) Currency unit –
This factor influences the amounts shown as assets, liabilities and owners’ equity says, William D King. For example, if a business has to report its financial position in dollars instead of rupees it will surely change the entity’s ability to make purchases or pay off debts.
b) Monetary unit –
It shows how many goods can be purchase with one monetary unit of a country. For example, 100 rupees is equal to 10 dollar cents. But more goods will be purchasing with the former if both units are use to buy goods. So change in the monetary unit can lead to a big impact on the values of assets and liabilities.
c) Nominal value –
It shows the amount of a currency without taking into consideration its purchasing power. For example, a person bought 100 shares worth US$100 each five years ago, and now he is selling them for US$400 each. The nominal value has doubled but the real value has actually fallen by 50%. Similarly, growth in nominal as well as real values depends upon growth in GDP as it affects their purchasing power ratio.
d) Other Factors-
There exist other factors that could affect accounting such as inflation, devaluation, exchange rates, etc. However, their importance is less as compared to the above factors mentioned.
Currency unit, monetary unit, and nominal value are some of the key aspects that must be kept in mind while preparing/presenting accounting reports says, William D King. They significantly influence financial statements because their values affect assets, liabilities, and equity featured therein. So it is essential for an accountant to keep these facts in mind while presenting any type of accounting report.
Companies wishing to do businesses internationally will have to deal with foreign currency transactions? The risk of loss from fluctuations in exchange rates needs to consider when assessing exposure to a price or other changes that may occur during the life of a foreign contract or investment.
Organizations doing business overseas need to carefully plan how they will handle exposure to fluctuating currencies, interest rates, and inflation. Some ways to manage these risks are through hedging. And trading in financial instruments such as forwards, futures, options, swaps, or swap options.
The foreign exchange market is a global decentralizing or over-the-counter (OTC) market for the trading of currencies. This includes all aspects of buying, selling, and exchanging currencies at current or determined prices. In terms of volume of transactions, it is by far the largest market in the world, followed by the Credit market. Offers to buy and sell are through the Forex broker. Who acts as an intermediary between a seller and a buyer whose identities remain anonymous. The foreign exchange market determines the relative values of different currencies.
The demand for a particular currency varies from one country to another. A company could have significant foreign currency transactions resulting in exposure to exchange rate risk. A company could also have certain assets and liabilities denominated in a foreign currency. Other than the functional currency of the reporting entity.
For example, Euro Disney Resort has net investments in Euro. Which are translating into U.S. dollars at each balance sheet date through the use of exchange rates. This translation difference recognizes as unreal gains or losses on the statement of income. Any gain or loss arising from translation will not include in determining net income. But instead will be reflecting as “translation adjustment” within shareholders’ equity on the balance sheet.
Exchange rates play a vital role in the successful trading of goods and services internationally says, William D King. Exchange rates are very important because their values can affect all aspects of accounting, including assets, liabilities, and equity. It also affects the financial position of an organization with respect to its past performance, present status and future prospects.