Objective of Financial Statements - a Critical Review

The management of all listed companies registered in UK are bound by law to prepare and provide financial statements for each accounting period. This has been the case since the conception of 'The Companies Act 1948' (Flint, 1982), last amended in 1985. Although it's been over 55 years of reporting entities preparing financial statements, the objective of these statements has always been a matter of discussion. The Accounting Standards Board (ASB) came up with a precise outline in 1999 which stated "The objective of financial statements is to provide information about the reporting entity's financial performance and financial position that is useful to a wide range of users for assessing the stewardship of the entity's management and for making economic decisions" (Accounting Standards Board, 1999). Astrazeneca International is one of the companies which prepare financial statements in compliance with 'The Companies Act 1985'.This essay is an attempt to critically evaluate the financial information provided by Astrazenca to find out if it meets the objectives set by the above statement. In order to achieve that, it's imperative to first understand the meaning of the highlighted components of the statement and have an overview of the company under discussion.

Astrazeneca: An overview

Astrazeneca is a leading pharmaceutical company formed in 1999 through merger of Astra AB of Sweden and Zeneca group PLC of UK (www.astrazeneca.com). The world pharmaceuticals market was valued at $492 billion in 2004 (Astrazeneca annual report, 2004). Moreover with Astrazeneca pumping in almost $3.8 billion into research and development for new drugs in 2004 at the rate of $15 million per working day makes it an interesting and an ideal entity to analyse (Astrazeneca annual report, 2004).

In addition to the above facts, Astrazeneca being a pioneer in its field will definitely be an ideal entity to study and analyze. Companies in the big league are expected to adhere to the highest level of standards while making their financial statements. However, to facilitate the process of evaluating Astrazeneca's financial statements, one must first comprehend as to what are the components that come together to form a financial statement.

The Major Financial statements - At a Glimpse.

There are three major financial reports which are produced on a regular basis by the companies to try and give an overall picture of how the business is doing. These are a) the profit and loss account. b) The balance sheet c) The Cash Flow Statement (Atrill, 2002).Interpretation of each of this will give its reader understanding of a specific aspect of the business.

The profit and loss account is an indicator of the financial performance of the company, showing the increase or decrease in the company's wealth over the financial year. In the UK the statement of total recognised gains and losses also forms the part of the company's performance statements. While the profit and loss statements details the trading and operational activities, the statement of total recognised gains and losses shows the unrealised gains or losses affecting the overall wealth of the company(AC1101A lecture2,2005). For instance Astrazeneca's group profit and loss account for 2004 shows its total turnover at $21,426 million and its operating cost at $16,971 million while its Total recognised gains and losses for the year shows unrealised gains due to foreign exchange adjustments.

Similarly the balance sheet shows a 'snap shot' of the company at a particular moment in time in terms of its total wealth at the end of the financial year (Atrill, 2002). The balance sheet shows the financial position of the reporting entity. It reflects the commercial substance of an entity's activities in terms of the assets it controls and the liabilities it has incurred. In case of Astrazeneca the assets column in the balance sheet also includes Goodwill and intangible assets. These show the value of the patents over drugs and other licences it holds.

Finally, the cash flow statement is suggestive of the liquidity and solvency of the company in terms of showing the activities that generated cash and the activities that absorbed cash. Astrazeneca's cash flow statement for instance shows that the net cash inflow from operating activities for 2004 was $6,061 million while the same for 2003 was $4,226. Suggesting that the net cash flow from operations was stronger and much larger than the profit. This is expected in most cases as depreciation is deducted in arriving at profit.

From the above discussion it is clear that the fundamental objective of a financial statement is to provide an interim measure of the enterprise progress (AICPA, 1973).Moreover, the statements provided by Astrazeneca are in coherence with the above deduction. This leads us into the question of who produces these reports.

The Reporting Entity

Financial statements are prepared by many organisations, e.g. banks, trusts, charities, incorporated entities etc. but the main focus of this essay is going to be the financial statements published by the listed companies. These are generally referred to as 'Reporting Entities' as mentioned in the ASB statement above.

Reporting entity refers to organisations that publish its financial information in accordance with certain accounting standards for e.g. ASB standards called the financial reporting standards (FRSs). Astrazeneca prepares its financial statements according to The Company Act, 1985 and UK generally accepted accounting principles (UK GAAP). Hence, a reporting entity should have a determinable boundary (Accounting standards review board, 2001). However the question remains as to who are the users of these financial reports and what do they need it for?

Users, Their Goals and Economic Decisions

According to Peter Atrill and Eddie Mclaney there are a wide range of user groups ranging from a customer to an investor analyst to a manager. However, it is much easier to classify them as investors, creditors and managers (AICPA, 1973). Moreover the most important users to whom these financial statements should look to serve are the people who have a limited access to information (as compared to the manager of the company) and a limited ability to interpret them.

Hence another important objective of the financial statements is to serve the users who primarily rely on these financial statements as a source of information to make their economic decisions.

Economic decisions deal