Objective A
What is financial information?
Financial information is any record or data related to an individual’s or business’s financial activities.
Why must financial information be understandable?
Financial information must be understandable, not just to the people who prepare it, but to everyone who needs to use it. Accountants and others in the field of finance may have in-depth knowledge of financial data, but their reports will be seen by managers, employees, investors, etc., who may not be as skilled in the finer points of financial interpretation. For this reason, useful financial information is presented in ways that are understandable, both in the language used and in the layout and format of the report.
Financial information is needed to make managerial decisions - describe reducing expenses.
If you look at your bank statement, you might see that you’ve spent quite a bit of money eating out with your friends over the past month. This isn’t necessarily a bad thing, but since you’re trying to save for a car, you know you need to cut back. Similarly,
managers may take a close look at financial statements to see how a business is spending its money and where it could make cuts. For instance, a manager might see that the sales team is spending quite a bit of money taking potential clients out to dinner. While these dinners may be important for closing sales, the manager might set a reasonable limit on how much each salesperson can spend on them per month. This could reduce the business’s expenses considerably.
Financial information is needed to make managerial decisions - describe increasing sales.
Let’s say your class is running the concession stand for all the high-school basketball games this year. You’re not making as many sales as you’d like. So, you check your class budget to see if you can afford to run some creative “two-for-one” deals to get people spending on concessions. Similarly, if a manager is hoping to increase sales, s/he might look at financial statements to determine whether or not the company can afford to spend more on advertising campaigns or sales promotions. A buy-one, get-one-free offer, for example, may boost sales, but the promotion makes sense only if the business can afford to give away the extra products.
What is accounting?
Accounting is the process of gathering, recording, organizing, and reporting financial data.
Why must financial information be comparable?
Users must be able to compare current financial information to past financial information. If they can’t, it’s impossible to see what financial changes have occurred in the business, either positive or negative.
A business’s financial information should also be comparable to data from similar businesses. Potential investors want to see how one company stacks up against another company in the same industry. Managers also want to know how their business is performing in relation to its competitors. Comparability is another reason businesses conform to widely accepted accounting standards—it provides across-the-board consistency that benefits everyone. Comparability and consistency go hand in hand; therefore, a business should choose a set of accounting standards to follow and change it only when absolutely necessary.
Financial information is needed to make managerial decisions - describe boosting profitability.
A company’s sales may be strong, but that doesn’t necessarily mean that its profitability (ability to yield a financial gain) is where managers want it to be. If profitability is low, a manager may analyze financial statements to see if perhaps prices are too low or costs are too high. Once the manager assesses the situation, s/he may decide to increase prices or look for ways to reduce costs.
What is variance?
Variance is the difference between what’s expected and what actually happens. In accounting, this often means a difference in numbers. Perhaps managers expected a five-percent increase in sales, but only a three-percent increase actually occurred.
Why is accounting important in business?
Accounting makes a business’s financial information useful for any number of purposes. A business’s accountants will, for example, use financial data to create a balance sheet (a snapshot of the business’s assets and liabilities) and an income statement (a record of the business’s financial performance over a certain period of time). These financial statements are very beneficial to a number of different internal and external users seeking more information about the company.
How should financial information be “treated”?
Even within the same set of accounting standards, there may be more than one acceptable way to “treat” (record and organize) a piece of financial information. The important thing is to treat the financial information the same way each and every time.
Why is trend identification important?
Financial information is used to predict a business’s future performance. By looking at what has happened in the past and what’s happening right now, it’s possible to get a good idea of what will happen in the future. Common trends that financial information can help managers to predict include sales, income, and expenses.
Identifying business trends is also important for investment purposes. Before investing in a company, potential investors want to analyze its financial performance over time to see if it offers a promising rate of return. They may look at financial information such as earnings, income growth, cash flow, and debt to identify positive or negative trends. Current investors also keep up with these trends to monitor their investments. If a company is not performing well, an investor may sell his shares and move the assets elsewhere.
Financial information is needed to make managerial decisions - describe planning business expansion.
Most businesses want to grow. And, growth can come in many forms—developing a new product line, expanding into a foreign market, hiring more employees, etc. Growth should create more income for a company, but it costs money to get started. When planning business strategies, managers use financial information to determine what the company can afford and how to finance new ventures. For example, the bike shop where you work wants to extend its evening and weekend hours. Your manager will have to review the shop’s finances to determine whether or not she can afford to pay the extra expenses for wages and utilities that the extra hours will create.
Give at least three examples of personal financial information.
Credit card transactions, Bank deposits and withdrawals, Loans (school, car, house, etc.), Wages/Salary, Bills (rent, utilities, wireless, etc.), and Investments, savings accounts, and other assets
Describe what makes financial information reliable.
When a user receives financial information, s/he should be able to safely assume that the
information is accurate. This means that the information is not only error free but is also complete.
Another characteristic of reliable financial information is neutrality. Neutral means impartial or unbiased. When accountants prepare financial reports, they should focus on the numbers, not how they’ll be interpreted or analyzed by those who receive them. It might be tempting to present financial data in a way that makes the company look better (or worse, depending on the circumstances), but biased information is not reliable or useful. In addition, it’s unethical for accountants to attempt to influence users of financial information. They must stick to the facts!
Financial information is needed to make managerial decisions - describe creating and adjusting budgets.
Many people find it difficult to manage their personal finances without using a budget. It is also difficult to manage a business’s finances without using one. Managers look at financial information to determine how much money they have available for budgeting purposes as well as how to allocate it. Financial information can also help managers adjust budgets as necessary. Perhaps the marketing department is consistently going over budget, but the shipping department is under budget. Having this information would help a manager to modify the budget appropriately.
Financial information is needed to make managerial decisions - describe checking up on the competition.
Managers don’t just look at their own companies’ financial statements. They look at competitors’ as well! Every public company is required to release a certain amount of financial information to the public. Managers can analyze competitors’
financial statements to see how they stack up to other businesses in the industry. They may also analyze another company’s financial statements to see if the business is worth acquiring (buying).
Give at least three examples of business-related financial information.
Accounts payable records, Accounts receivable records, Receipts, Sales invoices, Corporate credit card transactions, Loan documents, Expense reports, Income statements, Records of other assets
Describe what makes financial information relevant.
A good definition of relevant is “appropriate to the situation at hand.” With so many financial data available within a business, it can be difficult to distinguish what’s relevant from what’s irrelevant. The people who receive financial information need it to be applicable to their purposes. For example, a manager deciding whether or not to hire new employees may need to analyze a different set of financial data than a potential investor determining whether or not the company will provide a good rate of return for her/his money. Accountants must prepare their various reports with this in mind.
In addition to being applicable to its audience, relevant financial information is also timely. This means that it’s up to date. In many situations, outdated financial information is useless. Fortunately, advances in information technology have made keeping financial information current a much easier task for accountants.
Financial information is needed to make managerial decisions - describe managing debt.
Many businesses carry some debt, and that’s OK as long as they manage it properly. One type of debt may be a loan the business took out so that it could buy a crucial piece of manufacturing equipment. If the equipment boosts productivity and profitability, managers may look at the business’s financial statements and decide to use some of the extra cash to pay off the debt early.
Financial information is needed to make managerial decisions - describe making purchases.
From time to time, businesses make big purchases—buildings, equipment, vehicles, etc. Just as you would rely on your personal financial information before making a big buying decision such as purchasing a computer or a car, managers use financial statements to determine what the business can afford as well as the best way to finance the purchase. For example, financial information may show a manager that the company has enough available cash to purchase a new delivery van outright, instead of using credit and paying
interest.