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WHAT ARE THE 5 FINANCIAL STATEMENT ASSERTIONS?

Practically every financial statistic used to assess the stock price of a firm is derived from data from financial statements. No business can operate at its best without routinely doing its financial transactions, as these activities greatly influence the success or failure of such a business or facility. We'll go through what financial statement assertions are in this article as well as the five most notable ones.

What are Financial Statements?

Financial statements are documents that describe a company's operations and financial performance. Government organizations, accounting companies, etc. frequently audit financial statements to guarantee accuracy and for tax, financing, or investing purposes. It serves as a seal of approval.The balance sheet, income statement, statement of cash flow, and statement of changes in equity are the four basic financial statements for for-profit entities. A similar but distinct set of financial statements is used by nonprofit organizations.

What Do Assertions in Financial Statements Mean?

Financial statement assertions are declarations or guarantees made by businesses on the correctness of the data in their financial statements. The balance sheet, income statement, and cash flow statement are some of these statements. These claims, often known as management assertions, may be tacit or explicit.

Assertions in Financial Statements: An Overview

As was already said, a company's financial statement claims serve as a seal of approval, certifying that the data in its financial statements accurately reflects its financial status. This applies to each and every asset and obligation that appears on the balance sheet, income statement, and cash flow statement, as well as any information contained within.

Investors need to pay attention to these claims. This is due to the fact that data from these financial statements is utilized to calculate almost every financial indicator that is used to assess a company's stock. Financial indicators that analysts and investors frequently use to assess stocks, such as the price-to-book ratio (P/B) or profits per share (EPS), would be deceptive if the statistics were wrong.

In the US, accounting rules are set by the Financial Accounting rules Board (FASB). Companies are required to adhere to these rules when creating their financial statements. The Generally Accepted Accounting Principles (GAAP) must be followed when creating financial statements for publicly traded corporations, according to the FASB.

A company's statement preparer attests to five(5) separate financial statement assertions. These include claims of existence, completeness, rights, and obligations, as well as of accuracy and value, presentation, and disclosure. Below is a list with more information regarding each of these claims.

1. Precision and Value

A financial statement's data are said to be accurate and correctly valued if it makes the assertion of correctness and valuation, which states that all balances for assets, liabilities, and equity are used. This financial statement's assertion asserts that the various parts of the statement, such as assets, liabilities, income, and expenses, have all been correctly categorized. Recalculating all the calculations is one technique to check this claim.

For instance, the claim of proper valuation for inventory indicates that inventory is valued in accordance with IAS 2 principles set forth by the International Accounting Standards Board (IASB), which mandates that inventory be valued at the lower of cost or net realizable value.

2. Existence

According to the assertion of existence, the assets, liabilities, and shareholder equity balances shown on a company's financial statements exist as of the end of the accounting period that the financial statement covers. Simply put, this claim guarantees that the information being offered is accurate and devoid of fraud.

Checking all noncurrent assets and receivables physically will allow you to confirm the accuracy of the assertions' existence.

Any inventory statement that is part of the financial statement, for instance, bears the implicit claim that the inventory was there at the end of the accounting period. All items that are listed as assets or liabilities in a financial statement are subject to the assertion of existence.

3. Completeness

This claim confirms that the financial statements are complete and contain all information that must be disclosed for a specific accounting period. The claim of completeness also emphasizes that the total inventory figure shown on a financial statement includes all of a company's inventory, even inventory that may be temporarily in the custody of a third party. When a financial statement is said to be complete, it means that all of the transactions it contains happened within the accounting period it covers and that it contains all of the transactions that happened during that period.

You can run tests to make sure everything is complete. Among these include reconciling payables to supplier statements and going over the accounts. The trustworthiness of the financial statement assertions is the main factor an auditor examines while assessing a company's financial statements.

4. Rights and obligations

All assets and liabilities listed in a financial statement belong to the organization giving the statement, according to the simple assertion of rights and duties. Simply put, the company attests that it has full legal authority and control over all rights to the assets and liabilities mentioned in the financial statements.

The organization owns and possesses the ownership rights or usage rights to all recognized assets, according to the rights and obligations statement. It is a claim that all liabilities reported on a financial statement belong to the company and not to a third party in the case of liabilities. Reviewing legal papers, such as deeds and borrowing agreements for loans and other debts, will allow you to verify this claim's validity.

5. Presentation and Disclosure

Presentation and disclosure make up the last statement of a financial statement. This is the claim that a company's financial statements contain all necessary disclosures and information, and that all the information contained within is accurate and simple to understand. This claim could alternatively be described as an assertion about understandability.

Several experts review and verify the veracity of this claim using certain checklists. This makes it possible to confirm that the questioned financial accounts abide by the rules and standards of accounting.

Why are the assertions in corporate financial statements important?

They serve as the official declaration that the presented statistics accurately depict the company's assets and liabilities in accordance with the relevant rules for their measurement and recognition. In this article, we examine each claim and explain what it means.

Conclusion

Considering everything, it is clear that financial statement assertions are crucial claims made by companies regarding the correctness and reliability of their financial accounts. These claims act as a stamp of approval, attesting that the information in financial statements truly depicts the state of the company's finances. This holds true for each asset and liability on the cash flow statement, income statement, and balance sheet.

Accuracy and value, existence, completeness, rights and obligations, and presentation and disclosure are the five financial statements assertions. For investors and auditors to evaluate a company's financial stability and transparency, these claims are indispensable. They give financial reporting a foundation that supports business world confidence.

These claims are essential because financial measurements that are used to evaluate the stock of a firm rely on data from financial statements and no financial institution whatsoever can do without it, except they voluntarily want to head for a fall.