Accounting Standards and Financial Statements

Accounting Standards and Financial Statements


Accounting standards are rules and regulation which guides firms & organization on the format of reporting financial statements. International financial reporting standards (IFRS) provides principles upon which the firm need to report accounting information in a recognizable format. The paper analyzes financial statements by liquidity ratios, profitability ratios, and debt service ratios. It also provides a vivid comparison between IFRS vs. GAAP. Information helps accountants to draw the distinction when making an investment decision. The financial performance of a firm is determined through analysis of financial reports to come up with ratios for comparison. The reason for the regulation of the financial reports is to get uniform approach through which financial statements can be presented and reduces confusion. Uniformity in reporting provides standards upon which business operations can be compared quickly.

Regulation of financial reporting.

International Financial Reporting Standards (IFRS) are issued by the International Accounting Standards Board (IASB) for public-interest entities. China, India, and Japan plan to adopt IFRS to ensure that they have a uniform reporting system. The U.S is the capital market without an IFRS mandate. The primary body mandated to set accounting standards is the financial accounting standards board (FASB) in the U.S. FASB has developed Generally Accepted Accounting Principles (GAAP). The companies apply standards of GAAP in the process of compiling financial statements for instance balance sheet, income statement, and statement of cash flows. Compilation of the financial report through GAAP provide a piece of clear information to potential investors, organization, government agencies and employees (Fosbre, Kraft, & Fosbre, 2009).

In most cases, employees need to know the financial position of the firm so that they can start. The regulation aims to smoothen business operation. Some of the bodies which are mandated in administering GAAP include the Securities and Exchange Commission which is the body provides regulation to the U.S financial markets. The second body is public company oversight board which review auditing boards and determination of audit standard. The third body is FASB which sets accounting standards for all firms in the U.S and IASB which sets accounting standards to firms outside America to other countries.

There are two systems which are used to regulate reporting of financial reports which include Uniform systems of Accounts and accounting separation. The Uniform System of Accounts provides a mechanism of regulating reporting on various reports such as income statement, cash flow statements, balance sheet and operating statistics which are relevant for decision making in an organization. The main objectives for regulation of accounting reporting are to enable provision of accurate records of rate-making in which it identifies asset values, assessment of operator earnings, and monitor performance on investment, separate utility from non-utility activities, and transparency for investors. Regulations in financial reporting aim to provide the platform through which the firms need to report financial reports based on the standard set out by relevant bodies.

The challenges which are encountered in enhancing uniform standard in reporting of the financial statements which include some countries have not yet agreed on a common regulatory framework which can enforce IFRS worldwide. It poses a challenge on how it can be implemented since each state develops rules and regulation depending on prevailing circumstances. The difference between U.S GAAP rules and specific IFRS is based LIFO inventory method of accounting. It is difficult to achieve a uniform set of international accounting standards due to the difference in legal, cultural, economic and regulatory priorities among nations.

Comparison between IFRS and GAAP

There is a vast difference between IFRS and GAAP which the firms need to be keen when it comes to application. First, GAAP is used in the United States while IFRS is used in more 110 countries; hence it recognized globally. GAAP provides standard guidelines and structure for typical financial accounting while IFRS is used as a universal reporting method which allows international business to comprehend each other.

Performance indicator under GAAP is assets or liabilities, revenue or expenses losses, gains, comprehensive income while IFRS performance element is assets or liabilities and revenue or expenses. The underlying assumption under IFRS relies on a prominence ongoing concern and accrual while GAAP assumptions do not rely on ongoing concern since it is not well-developed in the U.S GAAP framework.

Inventory methods: Under IFRS, the use of the LIFO inventory method is not allowed. LIFO valuation of inventory does no show reflection of the flow of inventory; hence results in low-income level. Under GAAP, the companies are allowed to use LIFO for estimation.

Intangible Assets: Advertising costs or research and development costs as intangible assets are analyzed keenly under the IFRS to determine if the assets will have a future economic benefit to the organization while in GAAP they are recognized at fair market value.

Qualities characteristics: The some distinguishing difference between GAAP and IFRS is the qualitative characters to how the function of the accounting methods are applied. Analysis of GAAP indicates that it works in a hierarchy of characteristic for instance reliability, relevance, understandability, and comparability to deduce decision based on prevailing circumstances (Whittington, 2008). IFRS works on the same principle; however, decisions making process is not based on a hierarchy of qualitative characteristics or based on the specific prevailing circumstance.

Sarbanes Oxley Act

It highlights summary of the compliance which the company needs to take into consideration for instance SOX section 302 on the corporate responsibility for financial reports in an organization.

  1. CFO and CEO must review financial reports at all time
  2. Financial reports should not contain any misrepresentations

iii.    Presentation of financial information in report fairly.

  1. Internal accounting control is under the responsibility of the CEO and CFO
  2. Any deficiency or fraud in internal accounting controls noticed in the organization should be reported by the CEO and CFO.

SOX section 401 requires that the company discloses all financial information in reports in a concise manner and based on the SOX section 404 provides that management should assess internal controls to determine if they are effective in ensuring the success of the business (Chan, Farrell, & Lee, 2008). The information will help management to be vigilant in reporting all material facts in financial reports.

Economic Impacts of the IFRS

IFRS helps to streamline reporting standards in the economy. The comparison of the performance of companies across the industry becomes easy. The standards provide guidelines on how the company should adhere hence make it clear that company can adopt a uniform system of reporting, therefore, makes auditing of the account to be comfortable and in case of any fraud can be checked if all reporting was based on IFRS standards. It aims to protect shareholders from fraudulent management in the organization.


Understanding and evaluation of Financial Performance of Starbucks Corporation

Part 1

Liquidity Ratio Current Ratio =


Current ratio =>  = 2.198


Quick Ratio =


Quick Ratio =>  = 1.952


Debt services ratios



Debt Ratio =


Debt ratio =  = 0.9513

Debt service coverage ratio =


Debt service coverage ratio =  = 0.2515




Profitability ratios



Return on Assets = *100%


ROA =  *100% = 17.98%


Operating margin =


Operating margin =  *100% = 29.35%




The IFRS are critical in business operation. The analysis of the financial statement of Starbucks Corporation indicates that management applies IFRS in reporting of financial statement in the organization. Failure to follow specific rules in reporting of financial reports can cause the company to be fined for negligence in its business operation. It is appropriate for the company to have prudent management which is keen in following laid down structures for presentation of the financial reports.


Chan, K. C., Farrell, B., & Lee, P. (2008). Earnings management of firms reporting material internal control weaknesses under Section 404 of the Sarbanes-Oxley Act. Auditing: A Journal of Practice & Theory27(2), 161-179.

Fosbre, A. B., Kraft, E. M., & Fosbre, P. B. (2009). The globalization of accounting standards: IFRS vs. US GAAP.

Whittington, G. (2008). Fair value and the IASB/FASB conceptual framework project: an alternative view. Abacus44(2), 139-168.