Importance Accurate Financial Statements to the Government

Governments rely on taxes to fund their activities. One of the sources of tax is profits from firms. Inaccurate financial statements thus may understate the profits resulting into loss of income to the government (Reimers, 2005). Various aspects of the financial statements are particularly relevant for government taxation purposes. For instance, the taxable income is usually different from the reported net profit due to adjustments required to be made to such profit to arrive at the income used for tax purposes; upward adjustments such as depreciation charge and downward adjustments such as gain on sale of assets (Block, 2004, p. 128). Accordingly, inaccuracies in financial statements resulting from such items could lead into a lower or a higher tax than due. Where tax is understated, subsequent disclosures of the actual values could result into litigation and business closures. Therefore, accurate financial statements are also important for taxation purposes.

Conclusion

Financial statements serve various users external to the organization, in addition to their importance to internal organizational planning. This paper evaluates the importance of accurate financial statement to external users focusing on investors, lenders and government. To the potential investors, accurate financial statements helps them to assess the prudence of their investment decisions thus helps the firm to avoid litigation later when it turns out that investors suffered losses out of the entity’s fraudulent reporting of its financial position and performance. To the creditors and other lenders (e.g. banks) accurate information in the financial statements helps them determine the ability of the firm to repay the amounts advanced, thus influence their willingness to lend or advance credit to such a firm. To the government, accurate financial statements allow appropriate calculation of taxable income thus avoiding the loss of income that could result from inaccuracies. Accordingly, accuracy of financial statements is important in ensuring such statements are relied upon by various users, thus meeting one of the characteristics required of accounting information; reliability.

References

Block, C.D. (2004) Corporate taxation (3rd ed.). New York: Aspen Publishers

Brigham, E. F. & Ehrhardt, M. C. (2010). Financial management: theory and practice (13th ed.). Mason, OH: Cengage Learning, Inc.

Helfert, E.A. (2001). Financial analysis: tools and techniques – a guide for managers. New York: McGraw-Hill.

Reimers, J. L. (2005). Financial accounting: a business process approach, solutions manual (2nd ed.). Upper Saddle River, NJ: Pearson Prentice Hall.

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