Question

Provide a discussion on how accounting information helps businesses and why is it crucial for corporations. Refer to book keeping process and tools to facilitate an analysis. Elaborate with a few examples.

Answer 1

Financial accounting allows business to keep records of all its financial transactions. All the business operations that occur during the period are recorded to give a clear picture. The areas where accounting information helps in decision making include-

• It helps to allocate scarce resources. This is basically part of managerial accounting.
• It helps the creditors to assess the solvency, credit worthiness and liquidity.
• It provides investors with a analysis for and comparison between financial health of securities issuing corporations. Investors use the information to make decision about the valuation of the company.

The balance sheet and income statement represent a complete financial picture of a company. Ratio analysis is a useful tool that helps one understand how the business is performing financially and can be used to spot trends over a period of time. There are four ratio categories- Balance sheet ratio, profitability ratio, specific efficiency ratio & overall efficiency ratio. Depending on the need of the party, a ratio can be analysed. Eg. A bank will be more interested in liquidity ratio.

Further there are various other tools and techniques which are used and includes comparative statements, statement of changes in working capital, fund flow analysis, cash flow analysis, cost volume analysis.