Accounting and Decision Making

Financial accounting is a fundamental element of business. Every corporation need to do accounting everyday. It plays the role of analyzing business information of a company to its stakeholders, through the process of three activities, identification, recording and communication. Accountants select and record all economic transactions of companies. Those accounting records are classified and summarized into useful accounting information. The information is communicated to users through accounting reports. Using the accounting reports, people can make decisions related to the companies. It is also the major objective of financial account, to provide relevant information for decision making. And further achieve rational resources allocation (Burchell, Clubb, Hopwood, Hughes, 1980). In this essay, it will be discussed how financial accounting supports decisions making and resources allocation, and the reasons why the finance market needs financial reporting.

"Financial statements are central feature of financial reporting- a principle means of communicating financial information to those outside an entity" (Financial Accounting Standard Board, cited in Healy, Wahlen, 1999). Financial accounting is a tool for communicating relevant information from companies to external stakeholders. In this objective of financial accounting, the relevant information is all the data people can extract from the financial report used for assisting their decision making. Users can obtain different information from different statement of financial report. Statement of comprehensive income reports expenses and revenues over a period of time. Manager can know the company is making profit or losing over the period. Furthermore, comparison between companies in a same industry may help management. For example, adjust the selling price to gain revenue. Statement of financial position lists all the balances of assets, liabilities and owners' equity at a certain point of time. It shows the form of assets exist, and the sources of assets. It allows users to understand the liquidity of company's assets, aiding manager consider the cash is sufficient for operation, whether to acquire or sell assets. It also shows the proportion of debt in source of assets, which represents the burden of a company. Manager considers this as to determine borrow or redeem its loan. While contrast the assets and liabilities, users can know the ability of company to repay and the efficiency to use assets. Statement of cash flows reports cash changes in operating, investing and financing activities, showing a surplus or deficit of cash in the company. With a clear cash position, it provides assistance for manager to make better use of cash, such as lending out idle cash. In addition, it offers information of company's liquidity and future profit. For examples, redemption of debentures may lower the liquidity but reduce future interest expense, improving the profit.