In the world of business, it is essential to understand the financial information that companies publish in financial reports. Every company tells its financial story through its financial accounting reports and the key players who compile this story are accountants. The aim of every accountant is to use financial report to communicate financial information about a business operation to users. Such users are shareholders and managers. This communication is in the form of financial statements, which show in numbers the economic resources under the control of the management.
On the other end of this are managers who use financial statements to make business decisions. They recognise that accounting is the primary channel for communicating financial information about the state of a business. Top managers understand financial statements. This is a major reason why Corporate financial accounting is taught in MBA programmes. Skills managers are able to interpret financial statement and also apply non-financial statement disclosures. Examples of non financial statement disclosures are footnotes and supplementary reports
Like managers, investor are key users of corporate financial accounting information. They use them to make decisions. The question every investor has is “Should I invest in this company or not?”. The investor wants to know:
- The return or profit from the investment
- The risk involved
- The time period of return on investment
This above information are provided in every company’s financial statement. These statements report on a company’s performance, financial condition and reveal information and insights required for executive management’s level.
Financial Business Activities
The greatest value derived from financial reports is the insight gained into the business activities of the company. To effectively use accounting information, consider how the company conducts all its activities. All companies conduct the below four activities:
- plan business activities.
- finance those activities.
- invest in those activities.
- engage in operating activities.
Business are confronted with forces like market constraints and competitive pressures. Financial statements provide crucial input for strategic planning. The success of these plans can be used to take corrective action or make new operating, investing, and financing decisions.
Demand for Financial statement Information
Decision makers and other stakeholders demand information on a company’s past and prospective returns and risks. The key users who demand financial accounting information are:
- Managers and employees
- Investment analysts and information intermediaries
- Creditors and suppliers
- Stockholders and directors
- Customers and strategic partners
- Regulators and tax agencies
- Voters and their representatives
Supply of Financial statement Information
The quantity and quality of accounting information that companies supply are determined by managers’ assessment of the benefits and costs of disclosure. Managers release information with a condition that the benefits of disclosing that information outweigh the costs of doing so. Both regulation and bargaining power affect the costs of disclosure and benefits. They play roles in determining the supply of accounting information. The benefits of supplying accounting information include the company’s capital, labour, input, and output markets. The costs of supplying accounting information include its preparation and dissemination, competitive disadvantages, litigation potential, and political costs. Preparation and dissemination costs can be essential but in time past records show that companies often incurred those costs. The reason is because managers need similar information for their own business decisions. The potential for information to yield competitive disadvantages is high.