Today, financial accounting and reporting play an important role in every company. For instance, financial accounting and reporting provide useful information for the major stakeholders to make informed decisions. The important stakeholders that need the financial information include creditors and investors. In addition, financial reporting also helps in solving problems that may arise as a result of separating control and power in a company. Apart from the creditors and investors who play a major role in a company, the financial reporting must follow the accounting standards and principles (GAAP) established by FASB. Hence, financial reporting and accounting are important in every company because it provides useful information for major stakeholders.
Roles of Financial Accounting and Financial Reporting
Financial accounting and reporting provide important information for external stakeholders to help them evaluate the company’s profitability, growth, and risks. Most of the time, this is the information they need to value the shares of the company (Wahlen et al., 2020). For instance, evaluating the company’s profitability, risks and growth provide useful information for decisions by the stakeholders, and these decisions depend on the returns they expect for their investment. In addition, financial reporting provides useful information for decisions by the investors about selling, buying, and settling loans.
Financial reporting also plays the role of communicating the financial accounting information to the external decision-makers, creditors, and investors. This is because it provides useful information that helps the stakeholders assess the timing, amount, and uncertainty in future cash flows (Wahlen et al., 2020). The useful information provided maybe about a company’s resources and changes in the company’s economic resources to provide in-depth financial information for the stakeholders.
Additionally, the relationship between financial accounting and reporting is linked with the generally accepted accounting principles (GAAP). For instance, financial accounting has standards needed for financial reporting in a company.
Categories of Stakeholders that Need Financial Information
One of the major stakeholders that need financial information is the investors. The investors are the ones who enjoy the profits in cases where the company is successful (Wahlen et al., 2020). Thus, investors would always want to know more about the company’s financial information to make better decisions. For instance, the investors may want to know about the price and the number of stock shares to purchase.
The other category of stakeholders that need financial information is the creditors. This is because they always risk losing their investment since they have more claims in case of bankruptcy (Wahlen et al., 2020). For instance, if one wants to invest in a company, they would probably want to know more about the company’s equity capital to make more informed decisions. In addition, the creditors are also interested in knowing more about the company’s resources and loans to conduct any business.
Distinguishing Between Investors and Creditors as Users of Information of Financial Statements
Both the investors and creditors use the information of financial statements for different purposes (Wahlen et al., 2020). For instance, the investors tend to be more interested in profits, such as the source of future dividends plus the share value appreciation. However, creditors are more interested in the principal payment and source of interest (cash flows) in the financial statements.
How Financial Reporting Helps to Solve Problems.
Financial accounting and reporting helps to avoid potential problems that arise from the separation of control and ownership of a company’s resources. For instance, in most corporations, the most common shareholders (creditors and investors) provide financial resources by lending and investing in the company. This implies that the executives, managers, and employees are hired to run the company’s daily activities on behalf of the creditors and investors (Wahlen et al., 2020). Thus, the creditors and the investors are different from the employees and managers because they provide financial capital. Financial reporting helps to solve problems that arise in such cases due to separating the power and control between creditors plus investors and employees and managers etc.
Generally Accepted Accounting Principles (GAAP)
The GAAP entails a common set of accounting standards, procedures, and principles established by the FASB (Financial Accounting Standards Board) that US companies are needed to use while reporting financial information for use by an external shareholder (Wahlen et al., 2020). In the US, these methods and practices establish authoritative guidance for companies on how they should report events, transactions, etc.
Financial reporting and accounting provide useful information for major stakeholders such as creditors and investors in a company. For instance, it provides important information for stakeholders to help them evaluate the company’s profitability, growth, and risks. Financial reporting also plays the role of communicating the financial accounting information to the major stakeholders to help them assess the future’s timing, amount, and uncertainty. In addition, it helps to solve problems linked with the separation of control and ownership of a company’s resources. In addition to the various importance, the accounting standards and principles (GAAP) improve the financial reporting of most companies through a clear and consistent method.
Wahlen, J. M., Jones, J. P. & Pagach, D. P. (2020). Intermediate Accounting: Reporting and analysis (3rd ed.). Cengage Learning.