The usage of financial accounting information Essay

The usage of financial accounting information - Essay Example One of the uses of financial accounting information is for funding purpose.Capital from shareholders and loans and credit from creditors require reporting of financial accounting information to solicit funds.Since the shareholders provide the funds for the organization to run,they are interested in the returns earned on their investments. Financial ratios such as return on shareholders' funds can be calculated to assess the returns earned on their investments. They use information on past performance obtained from the financial statements comprising the profit and loss statement, balance sheet, and cash flow statement together with the present economic market conditions to predict the future returns. Also, since the shareholders elect the board of directors, they would want to regularly evaluate the management's performance. Profitability ratios, indications of earning capacity and ability to make profits, can be used by the shareholders to evaluate the management's performance. Loan creditors, such as bankers are interested in the financial stability and liquidity of the organization, as assessed by the liquidity ratios, solvency ratios, and capital structure ratios. Loan creditors would also like to know whether the organization is able to pay interest on time and to repay the principal of the loan. They can use financial ratios such as the coverage of fixed interest charges to assess the organization's ability in this regard. They are also interested in the amount of security existing for their debt, other liabilities the organization has and security offered for them. The balance sheet offers this information. Trade creditors let the organization obtain goods or services with postponed payment. They are interested in the ability of the organization to pay its debts as they fall due, as revealed by liquidity ratios. Both shareholders and creditors use financial accounting information to assess the timing and uncertainty of prospective cash receipts. The pros pects of cash receipts depend on the organization's ability to generate enough cash to meet its obligations when due and its other cash operating needs. The cash flow statement, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances. Another use of financial accounting information is to solicit investments from potential investors. Potential investors require information on various matters, including solvency, financial strength, earning capability, and the ability of the management to decide whether or not to invest in the organization. The financial statements and the various financial ratios derived from the financial statements mentioned in the above paragraph can be used by potential investors to make this decision. Lastly, financial accounting information is used to facilitate wage and employment negotiations. Management accounting information is used for decision making such as to accept or reject special sales order, fix selling or tender price, add or delete a product line or department, maximize profits with a limited productive capacity or scarce resources, make or buy a component, or further process joint products. The management accounting information used in decision making is relevant costs such as differential and marginal costs. A special sales order, such as an order of a particularly large quantity such that certain costs can be reduced, can be accepted if it gives a positive contribution margin (sales minus marginal costs), provided the organization has idle capacity, fixed costs will not change, normal sales at regular prices will not be disrupted, and no other special order that is more profitable can be obtained. The selling or tender price is used to determine the target market of the organization's products. Some products may be sold in a luxury market where prices may b e higher