Question

THINK TANK QUESTIONS HOW DO YOU THINK ACCOUNTING INFORMATION CAN ASSIST WITH DECISION MAKING?

Answer 1

Financial accounting allows a business to keep track of all its financial transactions. It is the process in which the company records and reports all the financial data that go in and out of its business operations. The accounting data is recorded on a series of financial statements including the balance sheet, income statement, and cash flow statement.

There are three main areas where financial accounting helps decision-making:

1 )It provides investors with a baseline of analysis for—and comparison between—the financial health of securities-issuing corporations.
2 )It helps creditors assess the solvency, liquidity, and creditworthiness of businesses.
3)Along with its cousin, managerial accounting, it helps businesses make decisions about how to allocate scarce resources.

Investing Decisions
Fundamental analysis depends heavily on a company's balance sheet, its statement of cash flows and its income statement. All of the financial statements for publicly traded companies are created and reported according to the financial accounting standards set forth by the Financial Accounting Standard Board (FASB).

Investors use the information from financial statements to make decisions about the valuation and creditworthiness of a company. Without the information provided by financial accounting, investors would have less understanding about the history and current financial health of stock and bond issuers. The requirements set forth by the FASB create consistency in the timing and style of financial accounts, which means investors are less likely to be subject to accounting information that has been filtered based on a firm's current condition.

Lending Decisions
Financial accounting is also a key for lenders. Because financial statements outline all its assets as well as the short- and long-term debt, lenders get a better sense of a company's creditworthiness.

A number of common accounting ratios creditors rely on, such as the debt-to-equity (D/E) ratio and times interest earned ratio, are derived from a company's financial statements. Even for privately-owned businesses that do not necessarily follow the requirements of the FASB, no lending institution assumes the liability of a large business loan without critical information provided by financial accounting techniques.

Ultimately, a lender wants to know just how much risk is involved by lending a company money, which can be determined by reviewing the company's financial accounting. Once this is determined, the lender will also be able to outline exactly how much to lend and at what interest rates.

Corporate Governance
Reliable accounting serves a practical function not only for investors and lenders but also for the firms themselves.

The most obvious benefit for businesses to complete their financial accounting is to meet the legal and regulatory obligations outlined for (public) companies. Companies must be honest about their financial activities and the data must be accurate and published regularly.

Beyond the regulatory and compliance hurdles financial accounting helps clear, financial accounting also helps managers create budgets, understand public perception, track efficiency, analyze product performance, and develop short- and long-term strategies.

The Bottom Line
Financial accounting is a way for businesses to keep track of their operations, but also to provide a snapshot of their financial health. By providing data through a variety of statements including the balance sheet and income statement, a company can give investors and lenders more power in their decision-making.

FUNDAMENTAL ANALYSIS

Balance Sheet vs. Profit and Loss Statement: What’s the Difference?

1. Relevant Costs Analysis
The most important job of the management accountant is to conduct a relevant cost analysis to determine the existing expenses and give suggestions for the future activities. One question stands out here: How should I spend my budget?

Before a company takes any action, it needs to explore all possibilities and figure out the best tactic to increase the profit. This means management accountants ought to analyze different sales channels, products, services, and marketing activities in order to find the most profitable business model.

Once the management accounting team is done with relevant cost analysis, you can make better and evidence-based decisions.

2. Audience Targeting
Marketers must pay special attention to their consumers. They represent an anchor of the business, so each company has to create a buyer persona with all of the corresponding features such as:

Age and gender

Location

Income level

Academic background

Lifestyle

Personal values

But even if you define the average customer, there is still some work to do.

According to specialists at the accounting help online, management accountants should analyze the value of every customer group to detect the most lucrative units: “With this special type of audience targeting, you can invest additional time and resources in markets that can bring you more profit in the long-term perspective.”

3. Make or Buy Evaluations
Product production is often the most expensive segment of the business, so it’s crucial to be sure which option suits the needs of your company. Generally, there are two solutions – make products on your own or buy them from the third-party provider. In this case, management accountants are those who should cut the knot and tell you what to do.

They can evaluate the real cost of each solution and determine whether it’s more appropriate to produce items internally or buy them from the manufacturer. This may seem like a simple decision, but it’s extremely sensitive and has the power to make or break your business.

4. Define Budgets
Nothing is random when it comes to budgeting. On the contrary, budget-related decisions must comply with your sales history and marketing database. This is where management accountants step in to analyze former activities and define investments for the future actions. They create financial plans for each department, project, marketing campaign, new product, or any other undertaking.

5. Controlling
Controlling is another important aspect of management accounting. Namely, it evaluates the work of all company units and makes conclusions related to the financial performance. That way, you get to learn the reasons for both the loss and the profit generated by your departments. In such circumstances, it is much easier for senior executives to reduce operational costs.

For instance, they can cut salaries in under performing departments or reduce the number of employees. On the other hand, they can also invest in branches that prove to be highly profitable, thus increasing the total profitability of the business.

6. Planning
The last benefit of management accounting comes from its potential to detect financial patterns and predict future developments. It enables you to stay up to date with the latest industry trends, which means you can react in a timely manner and implement strategies that allow you to stay head and shoulders above competitors.

With the planning power of management accounting, you can also create long-term business policies. Doing so, you make sure that the whole team stays on the same track and works uniformly towards achieving your business objectives.