Nature & Scope of Accounting
Financial statements, which consist of a balance sheet, an income statement, and a statement of cash flows, are used to evaluate the financial condition of an enterprise.
Financial analysis is of particular interest to creditors, potential and current stockholders, management, government agencies, customers, and labor. Creditors are primarily interested in the ability of the company to meet its current and long-term debts. Stockholders are more interested in the present and future profitability of the
enterprise. Management usually focuses on the trend in net earnings and makes decisions concerning possible changes in the existing capital structure in an attempt to maximize profits. The Internal Revenue Service might use the financial statements to determine whether the enterprise is paying its fair share of taxes, while other branches of the government use the information to study economic trends in the industry. Customers are concerned that the company will be financially able to maintain a steady source of supply and meet all of its commitments. Finally, labor might use the statements to formulate realistic (or unrealistic) wage Proposals.
Accounting: The Basis For Decision Making
Accounting provides the information required to make business decisions to accomplish the entity's financial goals. If a business is to be successful, it must generate earnings that are sufficient to meet the objectives of profitability and liquidity. Management may also have
other goals such as product improvement and the expansion of operations. To accomplish these objectives, management must select among various alternatives and must also study their consequences. The information generated by the accounting records, together with analysis of such data, is the basis on which virtually all business decisions are made.
What are the objectives of accounting?
To provide information:
1. That is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.
2. To help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans.
3. About the economic resources of an enterprise, the claims on those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources.