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Why Accounting is Important for Stakeholders

Discuss about the Accounting and Finance for Managers and Investors.

Too many accounting is perceived as the language of business that focuses on support decisions and management. Hence, in most cases, it tends to communicate the information needed by investors, managers, business owners with the aim of estimating performance in a company (Jeffrey, 2014). As mentioned the persons interested i.e. stakeholders get to focus on accounting as it makes them get involved in the business activities. In reality, it is believed that accounting for stakeholders tends to be important as it assists them in making effective decisions. It becomes obvious that no one can make an organization or develop investment without gaining the correct finance information. Therefore, it tends to be the duty of accountant to not only develop financial data but also ensure that the information being availed can be understood by the stakeholders (Shastri, 2009). Hence, this is important as it assists persons in the organization to develop effective business structure as developed in the accounting information provided. Therefore, the main purpose of developing this paper is developing an argument of accounting significance to manager’s ability to make decisions.

Based on the above explanation accounting tends to be a business language because it aims at assisting the internal and external happenings in business. Similar to language which is universal to people, it tends to be similar in accounting world because financial information is also interpreted in the same way. Hence, the accounting process is imperative because the systems tend to reveal profits or losses that an organization gains. Managers use the accounting methods to be able to reveal the components of assets, owner’s equity and also highlight the available resources in a particular period. Further, argument by (Rupert, 2015) is that through accounting managers can keep the record of cash when transacting. In other terms, it tends to be referred to as cash basis method. Thus, accrual accounting pinpoints tend to be exchanged and the non-exchanged transactions in real time. Hence, for managers in small business through cash basis accounting it tends to be an easier process since large firms rely on the accrual accounting as a result of government regulations (Humprey& Lee, 2004). 

A manager one uses accounting information for the purpose of assessing business progress. For instance, the development of financial documents through accounting such as balance sheets, audits or expense reports Assist accounting managers to follow the transactions and money closely. Hence, the information availed tends to determine if a business is financially solvent. As a manager, financial information is used to attract investors. Accounting information tends to allow investors carry out a measurement on performance so as to be able to determine if the inventory, liquidity, turnover and the stock performance is eligible for them to invest (Atrill & McLaney, 2001). Hence, without the slightest knowledge of accounts provided by the business, it makes investing decision hard. Governments also use accounting information availed by managers to understand what they are doing with their money effectively. Companies are taxed annually, and without accounting information, it becomes a milestone for the internal revenue service’s to establish the correct amount they should tax firms. Hence, accounting provided by managers tends to ease the viability of business being over taxed or under-taxed as the financial records tend to be effective in business operations (Schawarts & Stephanie, 2009).

The Role of Accounting in Business Decision Making

Both external and internal stakeholders of a company are in need of key financial ratios. Hence, the only way that managers can be able to prove or show the business dealings is through the development of key accounting ratios. At times corporate managers may make use of the financial statements ratios for the purpose of flagging problems which require attention, thus as long as they have access to a wide range of accounting information they can easily make efficient business decisions (Johnson, 2010). As a manager, the following are key ratios that should be carefully developed in pertinence with the business.

?    Liquidity ratios- liquidity ratios are developed for the purpose of assessing a company’s ability to pay off its bills. Hence, once managers develop this ratio via accounting statements they ease stakeholder’s ability to determine if the company can fund its operations and plans.

?    Debt management ratio- the debt management ratio tends to be an important measure of money that managers must focus on as it shows the extent to which a company relies on external debt funding of its operation and plans. Hence, to the stakeholders the development of this accounting ratio is important as it assesses the liquidity risks that excessive debt funding could have on the company’s viability and also the profit impact of interest rate changes.

?    Asset management ratio- this tends to be a key part money financial ratio as it shows the ability of management to effectively and efficiently manage assets under control. Hence, this accounting ratio provided tends to be important for business as it identifies poor management performance in asset management like fixed assets, debtors and inventory.

?    Profit ratios- via accounting managers develop profit ration thus showing financial sustainability of a company and its pertained ability in the generation of sufficient profits that meets the expected return of the investors. Therefore, profit ratio is a key money aspect as it monitors the selling price policy and offers comparable returns to investment which tends to benchmark investments against assets being employed and the equity being invested. 

?    Market value ratios- for the purpose of the attractiveness of a company through investment option in any competitive market for capital. The development of market value ratio is significant as it assists shareholders to identify the current market perceptions in regards to the future profit potential.


Therefore, it could pertain that through accounting business are able to make an effective measurement of their money. Therefore, for the purpose of developing a complete overview of financial position and performance of business, managers combine all these key financial ratios with the non-financial metrics to compare these ratios with previous years or with competitors benchmarking (Hartley et al, 2006). Therefore, we could pertain that development or considerations of financial ratios are a vital measurement of money as it contributes to high-value decisions to business stakeholders.

Key Financial Ratios for Managers

For years, it has been witnessed that through accounting companies have completely transformed their management practice. As a result, they have been downsized, hollowed out and delayed. Hence, newly trained and empowered employees have successfully been able to implement many innovation practices including the continuous improvements, reengineering and total quality management (Jeffrey, 2014). Thus, accounting has been able to outsource and exclude supply relationships allowing organizations to create more focus on their core activities. Innovations created as a result of accounts developed have fundamentally changed the relationships that exist between organizations, employees, suppliers, customers and stakeholders. Therefore, arm's length transactions occurring between independent parties have replaced the long term partnership because of accounting, thus creating flexibility to success. Therefore, companies should understand that the use of formal performance measurement that acts as an extension of the financial reporting system tends to justify practice, this is because the financial reporting systems (accounting records) tend to be reliable and consistent, hence the provide a solid foundation for development of rewards and accountability of structures (Burton et al, 2000). Accounting also an important measurement of money in an organization as it gives performance measurement some consistency based on organizational objectives. Hence, it could pertain that accounting has a critical role in the establishment of an effective business.

Come to think of what is the result of accounting information? We have effectively analysed the need of maintaining accounting data and the end results of this are preparation of financial statements showing the value of money. The development of these statements allows people to get a brief glance of an financial, organizational position (Humphrey & Lee, 2004). These statements are also important as they provide summaries of operating information and are extensively used by individuals inside and outside the organization. Hence, the statements can fall under two categories:

  • Status stock- these statements tend to be helpful as the show the financial status of the organization in a specific period.
  • Flow reports- these statements indicate the flow of financial information over a period.


Hence, the development of these two statements through accounting tends to be important to an organization because it shows the ability of an organization in a specified period. Requirements by GAAP shows that managers need to prepare three different statements in pertinence to showing the importance of money contributing o effective decision making, they include:

  • Balance sheet- this tends to show an organization resource at a given time. Hence, samples of information found on balance sheets include how much cash is in the bank or the value of the company’s assets (Lambert & Griffith, 2013).
  • Income statements- this is a report that shows the flow of revenues and expenses over a given period. Therefore, the development of this allows managers to be effective in their dealings regarding analysing some expenses they have used, and the revenues generated (Chadwick, 2004). Statement of cash flow- this happens to be a flow chart that details the movement of cash throughout the organization for a specified period of time. Therefore, with this it allows stakeholders to understand how money in the business has been utilized effectively.


In conclusion, we could pertain that accounting is a process that offers useful information and relevant for interested parties when developing effective decisions about a company and its operations. Hence, with this in mind, the specific language and subsequent rules have been developed for users of the information (Low, 2004). Therefore, now that we have pertained that accountability tends to be part of the accounting process, come to think of why we need to enforce it in any organizational setting. An organization needs to be held accountable for the methods used in running the business because of the existing potential of greed, dishonesty and theft. Currently, on the newspaper, we have read the fall or large firms because of their managers not effectively considering the accounting records some of these firms include: Enron and HealthSouth (Rothovius&Yli-Olli, 2014). Hence, failure to consider accounting as a money language makes it almost impossible for firms to succeed. Therefore, accounting is pertained to be a conscious factor in the business world, thus when handled critically performance is expected and when abuse occurs the system becomes overridden because of greed and dishonesty. Therefore, accounting emerges as a system in place that is good as long as people effectively use them. 

References

Schwartz-Driver & Stephanie (2009).Personal finance : a guide to money and business. Marshall Cavendish, Tarrytown, NY

Jeffrey, C. (2014). Research on professional responsibility and ethics in accounting: Vol. 18. Bingley, U.K: Emerald.

Rothovius, T.&Yli-Olli, P. (2007). Contributions to accounting and finance: Essays in honour of PaavoYli-Olli. Vaasa: Univ. Wasaensis.

Shastri, F. C. (2009). New horizons in accounting and finance. Jaipur, India: Book Enclave.

Johnson, S. K. (2010). The Harvard Business Review Annotated Bibliography: All Articles, 1922 through 2007, With Indexes to Authors, Titles and Subjects. Jefferson, N.C: McFarland.

Humphrey, C.& Lee, B. (2004). The real life guide to accounting research: A behind-the-scenes view of using qualitative research methods. Amsterdam: Elsevier.

Rupert, T. J.&Kern ,B.(2015).Advances in Accounting Education: Teaching and Curriculum Innovations (Advances in Accounting Education, Volume 17) Emerald Group Publishing Limited, pp.iii

Review of accounting & finance. (2002). Bradford: Emeral https://books.google.co.ke/books?id=ZrocAgAAQBAJ&pg=PA170&lpg=PA170&dq=Review+of+accounting+%26+finance.+(2002).+Bradford:+Emerald&source=bl&ots=bQladPm73c&sig=KOAK8YLetUdsrCLaXG3MQubhnP8&hl=en&sa=X&redir_esc=y#v=onepage&q=Review%20of%20accounting%20%26%20finance.%20(2002).%20Bradford%3A%20Emerald&f=false

Low, R. J. (2004). Accounting and finance for small business made easy: Secrets you wish your CPA had told you. Irvine, Calif.: Entrepreneur Press.

Chadwick, L. (2002). Essential finance and accounting for managers. Harlow, England: Financial Times Prentice Hall.

Lambert, R. A., & Griffith, K. (2013). Financial literacy for managers: Finance and accounting for better decision-making.

Burton, E. J., Bragg, S. M., & Burton, E. J. (2000). Accounting and finance for your small business. New York: John Wiley & Sons.

Atrill, P., & McLaney, E. J. (2001). Accounting and finance for non-specialists. Harlow, England:Financial Times/Prentice Hall.

Hartley, C., Firer, C., & Ford, J. C. (2006). Business accounting and finance for managers: An introduction. Johannesburg: Witwatersrand University Press.

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