CORPORATE FINANCIALS REPORTING-UNDERSTAND THE FUNDAMENTALS

The Corporate Financial Accounting class of the ongoing Executive Master of Business Administration (EMBA 28) at Lagos Business School of Pan-Atlantic University, Lagos, Nigeria, has quite been interesting and nostalgic for me. As a graduate of accounting also being a practicing accountant of almost two decades, going back to class and learning the basics over again has been quite nostalgic and humbling experience.

Listening to Professor Owolabi and his methodical teaching approach, patiently taken on each topic, ensuring non accountants executives in the class gets hands on of each topic and understanding the fundamentals. Professor Owolabi teaching style always ensure lots of examples and group works are done on each topical area.

We began with MODULE 1, having two sessions covering the following topics:

1. Users and suppliers of financial statement information.
2. The four financial statements, and the accounting equation.
3. The basics of profitability analysis.

Exploring each topic:

1. USERS AND SUPPLIERS OF FINANCIAL STATEMENT INFORMATION.

FINANCIAL STATEMENTS: DEMAND AND SUPPLY

Demand for financial statements has existed for centuries as a means to facilitate efficient contracting and risk-sharing. Decision makers and other stakeholders demand information on a company’s past and prospective returns and risks. Supply of financial statements is driven by companies’ wish to lower their costs of financing and less obvious costs such as political, contracting, and labor. Managers decide how much financial information to supply by weighing the costs of disclosure against the benefits of disclosure. Regulatory agencies intervene in this process with various disclosure requirements that establish a minimum supply of information.

Demand for Information

The following broad classes of users demand financial accounting information:

■ Managers and employees

■ Investment analysts and information intermediaries

■ Creditors and suppliers

■ Stockholders and directors

■ Customers and strategic partners

■ Regulators and tax agencies

Supply of Information

In general, 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 provided the benefits of disclosing that information outweigh the costs of doing so.

Benefits of Disclosure

The benefits of supplying accounting information extend to a company’s capital, labor, input, and output markets. Companies reap the benefits of disclosure with good news about their products, processes, management, and so forth. That is, there are real economic incentives for companies to disclose reliable (audited) accounting information enabling them to better compete in capital, labor, input, and output markets.

Costs of Disclosure

The costs of supplying accounting information include its preparation and dissemination, competitive disadvantages, litigation potential, and political costs. Preparation and dissemination costs can be substantial, but companies have often already incurred those costs because managers need similar information for their own business decisions. The potential for information to yield competitive disadvantages is high. Companies are concerned that disclosures of their activities such as product or segment successes, strategic alliances or pursuits, technological or system innovations, and product or process quality improvements will harm their competitive advantages. Also, companies are frequently sued when disclosures create expectations that are not met.

Watch out for the remaining two topics under Module 1 in my next blogging. Thank you for reading.