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Using Financial Accounting to Boost Company Performance and Credibility
One of the highly specialized area of accounting is financial accounting which constantly monitors a company’s financial dealings. Guided by approved standards, these financial dealings are duly recorded, condensed, and submitted in a financial statement or a financial report usually in the form of balance sheets or income statements.
The purpose of external financial statements
Companies usually issue external financial statements on a regular basis. They are referred to as external because information about a company’s financial performance and standing is handed out to people outside of the company. This information is mainly given to owners, stockholders and to certain lenders who want to come up with a value for that business based on the financial statement.
However, once a company’s stock goes public, its financial statements and reports go public, too, which means employees, customers, investment professionals, labor groups, and even competitors will also have access to the information.
It has to be clearly emphasized that the intention of financial accounting is not to appraise a company’s value. Instead, the aim is to furnish sufficient information so other people can evaluate the company’s worth by themselves.
The role of management
This information is vital to owners and stockholders who are concerned about knowing the financial position of a company that they own in part. Being given an accurate picture of their financial landscape makes a company reassess the capability of its management and the resources made available to them to propel the company forward. The effectiveness of a company’s management is determined with the help of financial reports.
The management team is held responsible for the disbursement of company funds to make the business operate smoothly and economically. Financial statements can be employed to measure management efficiency in the manner in which the allotted resources were spent and help determine whether they should be relocated to another division or entirely replaced to improve the company’s profitability.
Generally Accepted Accounting Principles
As external financial statements can be utilized by different sectors in different manners, financial accounting obeys rules of accounting standards known as Generally Accepted Accounting Principles or GAAP. Accounting standards and principles used all over the U.S. is formulated and developed by an organization called the Financial Accounting Standards Board (FASB). Corporations which have their stocks traded publicly should also act in strict accordance with the accounting requirements of the U.S. government’s Securities and Exchange Commission (SEC).
Financial and business accounting that abide by the Generally Accepted Accounting Practices or GAAP creates an honestly transparent business environment, and earns the trust and respect of the recipients of their financial statements.
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