The Importance of Financial Accounting to Business Managers and Investors

The knowledge of financial accounting is critical to making informed business decisions.

Business managers are saddled with the responsibility of making decisions and they rely on available information. Information required to make decisions is often very huge and can be retrieved from Accounting Information Systems (AIS) which are usually components of an Enterprise Information System (EIS). In order for Business managers to access and use relevant information for business decisions, they have a responsibility to understand these Accounting Information Systems.

I have also learnt from the Corporate Financial Accounting course that, apart from the business managers, the stakeholders of a company also rely on information to make decisions. The Stakeholders are also known as investors.

Hence, the Corporate Financial Accounting course aims to fulfil the needs of the stakeholder (investor) by providing him with information to answer questions such as “should I invest in this company or not? There are certain pointers the investor considers when deciding to make an investment in a company or business. These are the return on investment (ROI), the time it would take and the level of risk on such investment. The investor also considers the risk profile of the company of interest.

Information that would be relevant and useful to the investor can be retrieved from the annual reports and accounts of companies of interest. Specifically, the investor focuses on the financial statements available in the annual reports of companies.

I have learnt from the Corporate Financial Accounting course that there are four financial statements and notes to the financial statements which can be found in the annual reports of companies.

These are:

1. Statement of Financial Position, also known as a Balance Sheet.
2. Statement of Profit or Loss, also known as an Income Statement.
3. Statement of changes in Owners’ Equity.
4. Statement of Cash flow.

An addition to these statements is the notes of the financial statements.

Brief explanations for these statements are given below:

1. Statement of Financial Position: This financial statement is also known as a Balance Sheet. It reports a company’s financial position and resources (assets) at a particular point in time. A company’s resources or assets is usually financed by the owner’s equity and debt, also known as Liability. Hence, there are three (3) major accounts in a Balance Sheet which form its structure. These are Assets, Owners’ Equity and Liability.

2. Statement of Profit or Loss: This financial statement is also known as Income Statement. This statement gives a report on a company’s performance over a period. The income statement reports a company’s revenue, also known as Sales and Expenses over time, as well as the net income resulting from the total sales and expenses. The Net Income is considered as either a profit or loss. There are 3 major accounts in the income statement which form its structure. These are Revenue, Expenses and the Net Income (profit or loss).

3. Statement of Changes in Owners’ Equity: This financial statement gives a report on the changes made in owner’s equity over a period. The statement shows movement in the accounts from one point in time to another, as well as the activities that brought about the changes in the equity. There are usually different components or types of owners’ equity, and these are captured in the financial statement. Examples of components are Contributed Capital, Retained Earnings, Non-controlling Assets, Other equity, etc.

4. Statement of Cash Flow: This financial statement reports the changes in a company’s cash flow over a period. This statement usually reports either an increase or a decrease in the company’s balance resulting from the investing, operating and financial activities over a period of time. The direction of the cash flow can either be an inflow or an outflow.

Before my MBA, I knew nothing about financial statements and I worried I was not getting enough information about my personal savings and investments. Although I regularly receive reports from the banks and investment platforms, I could not interpret or understand them. Having attended some sessions in Corporate Financial Accounting and gained some knowledge, I am happy that this course will equip me with the skills I need to read, interpret and analyse financial statements, and be better informed to make sound business decisions as a manager and an investor.

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