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The role of Financial Accounting ‘Accounting is an information system that included recording, classifying, presenting and analyzing of financial information. “(Andy and Patrick 2003) Business firms need to prepare and publish various types of financial statements regularly. There are closely linkage between business activities and the decision marker. In business society, because of the scarce resources, the decision marker needs to make the reasoned choices through communicating with the financial information. Therefore, financial accounting is an important step in business for decision makers to operate a business.
In this essay, it explains the major objectives and roles of financial accounting and relevant information. Also, it analyses the users of financial reporting and the importance of the financial reporting in the financial market. It also includes the role Of financial accounting to assist in efficient resources allocation. The major objective of the financial accounting is to provide information about the financial position and performance that is useful for a business user to make economic decisions and identify the major problem through the financial statements in the company.
In more details, financial accounting attributes three functions for decision makers which are planning, controlling and evaluating. In planning, decision makers can make use of the financial information in the planning process. For example, when the production manager introduces a new product in the same line, the manager needs to evaluate the actual cost data for similar products in the past and decide whether the product should be introduced. In controlling, managers compare the actual performance with the pre-set standards through analyze the financial information of the company.
Further actions should be taken if the performance cannot meet the pre-set standards. In evaluating, financial information is provided for external users to make decisions. For example, the potential investors will evaluate the profitability the company in making investment decisions. “Financial Reporting should provide information which can meet the needs of different users. “(Belvedere 2007) The users can be divided into TV’0 types, internal and external users. Internal users have a direct interest financial interest in a business and external users have an indirect financial interest.
Internal users include investor group, managers, creditors and employees. The investor group, which includes present and potential shareholders, is interested in financial reporting because they want to make their share trading decision. They are more concerned about the ability of a company to pay higher current dividend. In a company, managers are the major users of the financial information disclosed by financial statement. Managers based on the financial information for planning decision making, controlling, allocating resources.
In order to maximize the profits and minimize the risk, managers can analyze the financial position of the company and evaluate the risk to make a rational decision through the experience. Creditors are concerned the company’s liquidity and cash flow as well as the profitability. It is because they are just mainly interested in whether the company can repay the debt and afford the interest . Employees are interested in the current financial stability as it related to the salary stability. External users include government and public groups.
Nowadays, government and public group have become an important users of accounting information. The companies need to prepare a financial statement for computing tax liabilities to the government. The government tax authorities, such as the Inland Revenue Department in Hong Kong, use the financial information to evaluate the profits tax for a year of companies. Another external users is public groups, which include labor unions, customer groups and economic planner. Labor unions study the financial statement of companies for negotiations.
The public are more interested in financing, earning of corporations as well as the social issues and the environment. The economic planner study the financial reporting for setting and evaluating the economic policies and programs. Because of increasing awareness of financial reporting in society, the companies disclose the financial statement to the public. “Relevant information is the attribute that make the financial information provided useful to the users for making decisions in different aspects. ” (Andy and Patrick 2003) Relevant information can be added value in the decision making process.
It contains two elements, predictive value and confirmatory value. Predictive value helps users to estimate past, present and future events and confirmatory value helps users to correct their past evaluations and decision making. For example, a creditor is concerned more about the liability and owner’s equity in financial statement than the income statement in order to evaluating the creditworthiness and ability for payment, so the financial statement is relevant information for the creditor. “By definition, a financial market is the place where the exchange of securities or other financial assets takes place. (Chemung 1997) In order to cord the transaction of securities in the financial market, the financial reporting is needed. In the financial market, there are many complicated transaction, so the transaction data need to be recorded for further purpose. Also, financial reporting of the finance market provide data for security holders to make decision. The security holders can analyze the financial report of the finance market and decide whether they should purchase or sell the security. Furthermore, it is important for a listed company to disclose its financial reporting in the finance market.
It is because the financial reporting shows the net profits or net loss of the company, the investor can make the investment decision according those reporting. Therefore, it is necessary for having financial reporting in finance market. The financial accounting plays an important role in allocating resource effectively in a company. Firstly, the financial accounting provide actual data for the managers to allocate the resource and make decisions. For example, the production manager can study the data in financial statement to know whether the company have enough inventory, if not, the manager need to arches more goods or resource.
For the financial management, the financial manager are more concerned about the total assets. If there is not enough capital to operate, the manager have to raise fund. Therefore, financial accounting provide database for managers to allocate the resource in different aspects and processes. Moreover, financial accounting shows the position of the company, it helps the manager to have a planning and controlling. In planning process, financial accounting indicate the direction of the company, the manager can easier set the objective of the firm.
For example, there is a net profits in the company, then the manager can allocate resource similarly in next year. If there is a net loss in the company, the manager have to define the problem and relocate the resource effectively. In short, financial accounting play an important role for decision making process in the company. Series want to know how the firm is doing and how much the firm is worth, then they can make a decision according to the information. The manager can evaluate and control the financial policy though analyze the financial information.