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 Financial Systems and Processes

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Summarised Assessment

Financial system and processes can be understood as set of procedures tracking financial

activities of a company. It functions differently at global, regional and firm specific level. At the

global level, it takes into account financial institutions, borrowers and lenders while at regional

level financial system and processes is considered with exchange of funds between lenders and

borrowers. It is worth mentioning that financial system is a wider term encompasses all aspects

of finances like accounting measures, financial statements, cash flow management, ratios and

management control, non- financial measures, credit policy and many more (Miles 2003).

Accounting measures keeps a check on the business activities-operating activities,

investing activities and financing activities. The business firm performs wider range of activities

and several groups of people are having interest in such activities. The performance of business

activities require business firm to acquire assets and using assets for creating profits. In this

regard, it is necessary to measure, monitor and control the performance of assets in terms of

profit generation and cash flows. The costs created or caused by purchasing assets are measured

against profit generated by it. There has been significant change in the accounting measures in

the past years and present time (Isard 2005). In the present years, the accounting measures are

based on accrual system where transaction enters in the books at the time of occurrence rather

than when actually payment is made or received. In the past time, events or transactions are

entered only when the payment is received. The accrual accounting measures provide more

accurate and clear picture of the companys current condition through matching revenues with

expenses (Dodaro 2009).

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 Financial statements present financial position of a business organisation at the end of

specific period. There are two components of financial statements-statement of profit and loss

and other comprehensive income. The performance of the company is provided through the

financial statement enabling shareholders and investors to gain idea regarding profitability

position of the company and base their investment decisions. It has been analysed that current

trend of financial statement is IFRS (international financial reporting standards) (Thakor 2006).It

is introduced with the purpose of establishing uniformity in the financial statements prepared by

regional, national and international level business firms. In detailed terms, it has been identified

that there is significant difference between the financial statement prepared by regional and

multinational corporations making difficult for investors and other stakeholders to analyse and

arrive at decisions (Dodaro 2009).

In light of this, IFRS is introduced and all the business entities are asked to prepare

financial statements in accordance with it. Under it, business firms are required to prepare and

present the information in the comparative form, i.e., presenting information for the current and

past period in comparative form (Allen 2001). The comparative presentation of information

makes it easier to judge, evaluate and measure the financial performance. The items as income,

expenses, revenue, depreciation, cost of sales, etc are entered in financial statements in

accordance with IFRS. The format, layout and presentation of financial items are clearly

specified by the IFRS and business entities of all sizes are under strict obligation to comply with

it (Duffie 2013).

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 Third element of the financial system and process includes cash flow management

emphasis on recording inflow and outflow of cash from business operations. The investing and

financing decisions of a business firm is taken in light of cash flow statement. In simple terms, it

can be understood in a manner that cash flow statement provides detailed assessment of where

the money has come and gone during the accounting period (Allen 2001). There have been

considerable shifts or change in the cash flow management. In the past years, cash flow

statement provides general overview and description of the cash inflow and outflow. In other

words, there is summarised form and picture of cash inflow and outflow of business activities.

However, with the increased significance of cash flow management in investing and financing

decisions, cash flow statement is prepared in more bifurcated and detailed manner (Smith 2013).

There is clear segregation of business activities in operating, investing, financing and other

activities in order to comprehensively present and cover all the items. In all, cash flow

management of present time provides detailed picture of inflow and outflow of cash from

business operations and activities.

Moving further, ratios also form integral part of financial system and process concerned

with inventory position and management, operating cycle, control systems and methods. It can

also be defined that ratios act as performance measurer of business firms. The inventory,

operating cycle, debtors and creditors positions, etc are regularly analysed in order to have an

idea regarding capital structure, liquidity position, profitability margins, etc. The ratios are also

considered as internal tool of reducing waste and mismanagement (Buckley 2009). The purchase,

sales, and stock are under strict check and control by the ratio. It has identified that different

kinds of ratios are calculated for different purpose. The major ratios are profitability ratios,

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investment ratios, liquidity ratios, etc. The market analysts and investors gain understanding

regarding companys internal and external performance with the help of ratio analysis (Isard

2005).

Apart from above discussed financial measures, there are also non-financial measures of

performance like market position, product leadership, product quality, production cycle,

environmental responsibility, etc. All these aspects speak a lot regarding performance of a

business entity thereby providing base for decision making. The investors and stakeholders do

not measure and judge organisations performance only on the basis of financial measures.

Rather, non-financial measures are also used for having comprehensive understanding of the

performance of the business firm (Dodaro 2009). It is also said that decision making process

based only on financial measures do not provide accurate decisions. The aspects as market

position, leadership status, technological advancements, product and service quality, wastage,

production system, customer satisfaction index, delivery time, etc also assist in decision making

process. The non-financial measures provide theoretical overview of the firms performance

while financial measures provide practical insights. The perfect integration among financial and

non-financial measures enables stakeholders to arrive at factual decisions (Miles 2003).

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References

Allen, L. 2001. Global Financial System 1750-2000. Reaktion Books.

Buckley, R.P. 2009. International Financial System: Policy and Regulation. Kluwer Law
International.

Dodaro, G.L. 2009. Core Financial System Checklist: Systems Reviewed Under the Federal
Financial Management Improvement Act Of 1996. DIANE Publishing.

Duffie, D. 2013. Replumbing Our Financial System: Uneven Progress. International Journal of
Central Banking, Vol. 9 No. S1.
Isard, P. 2005. Globalization and the International Financial System: What's Wrong and What
Can Be Done. Cambridge University Press.
Miles, B.L. 2003. The Canadian FINANCIAL System. Nova Publishers.

Smith, J. 2013. The Future of the Financial System: Or the End of the Alchemist Age. John
Smith.
Thakor, A.V. 2006. The design of financial systems: An overview. Journal of Banking & finance
20, pp. 917-948.

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