Financial Awareness: In this study, being the Financial Manager of the small-medium sized private limited company having international clients, an analysis of the financial systems, processes, and procedures to maintain the company’s financial sustainability and achievements of its shareholders’ satisfaction are discussed. It is particularly important for the decisions to be made based on specific financial data, for organizations to meet regulatory requirements especially those of the financial sector, and for enhancing organizational development. Answering the second research question, this report highlights financial information, the reasons for its use and its drawbacks, as well as mentions the main stakeholders. It covers accounting modalities and theories, management accounting techniques, and applications of data in published reports. Last of all, the report contains an evaluation of financial texts and outlines the patterns of financial data published in the Internet, as well as suggests how the organization might enhance its financial standing to contribute to its sustainable strategic plans.
Purpose of Financial Information
Financial information is crucial for various stakeholders involved in the business ecosystem. Its primary purpose lies in supporting decision-making processes, enhancing performance evaluation, ensuring regulatory compliance, and assessing creditworthiness.
Investment Decision-Making:
Financial information serves as the foundation for investment decisions. Investors, both institutional and individual, rely on financial data to assess the profitability, growth potential, and financial health of companies before committing capital. Metrics like Earnings Per Share (EPS), Return on Equity (ROE), and Price-to-Earnings (P/E) ratios help investors determine a company’s current standing and potential for growth. Through evaluating these ratios relating to business profitability, liquidity, and solvency, investors can decide when to invest, whether to hold an investment or divest in that investment (Brigham & Ehrhardt, 2022). They use insights to reduce exposure and discover potential for getting returnshttps://finanacialconsultancy.com/.
Performance Evaluation:
To management, financial information is a means through which organizational efficiency and achievements on strategic objectives can be assessed. Segmental operating revenue, cost of sales, operating expenses, and operating income are shown in the financial statements for different business areas to reveal appealing and unappealing aspects. This data is used by managers to manage on aspects on costs, resources, and improvement on operations. Such figures as return on assets (ROA), return on equity (ROE), and operating margins are all implemented to study the success of getting manage strategic decisions. Monitoring of financial results on the regular basis also allows the management to get aware of organizational goals and make some changes to the business strategies when needed (Horngren et al., 2021).
Regulatory Compliance:
Governments and tax authorities need details of a business organization’s performance with a view to enact the set statutory requirements like tax and other financial statements’ reporting requirements. Vital records of the financial position of an enterprise makes it easier to meet the standard as laid down by the likes of the Security Exchange Commission (SEC) and the International Financial Reporting Standards (IFRS). Accurate financial statement is creation of truth which protect the companies from legal activities and the regulators. Annual checkups and statements of financial position propagate responsibility, combat embezzlement, and add to the economic financial health (Horngren et al., 2021).
Credit Assessment:
Credit information is employed by financial institutions in evaluating the credit status of an organization. The firm’s ability to meet its obligation with creditors constitutes the liquidity aspect, the solvency aspect and the profitability aspect. Coefficients including the debt ratio, current ratio and quick ratio allow the banks and creditors to understand how a company is placed to meet its obligation. Big say has it that firms with good financial condition will be given good credits and reasonable interest rates compared to firms with poor financial status which are likely to status are likely to be given expensive rates or denied credit by the credit granting facility. Financial information also helps creditors in determining the right credit terms to be used in the financial contract with a view of ascertaining the viability of the credit arrangement (Laux & Leuz, 2020).
Limitations of Financial Information
Financial Awareness: However, it should be noted that the reports contain several weaknesses concerning financial information that can affect the quality of the informationhttps://finanacialconsultancy.com/.
Historical Nature:
Most of the financial statements are prepared from historical records which can be highly misleading in today’s markets and possibly the future ones. While past performance is valuable, it may not always be an indicator of future success. Changes in the economy, technology, or consumer preferences may not be captured in historical financial reports (Atrill & McLaney, 2022). This limitation can reduce the predictive power of financial statements in rapidly evolving industries.
Non-Monetary Factors Ignored:
Financial statements typically focus on quantitative data, leaving out important qualitative factors that could significantly influence a company’s future success. Intangible assets, such as brand reputation, employee morale, customer loyalty, and intellectual property, do not always appear in financial reports. These factors can be vital to understanding a company’s long-term value and competitive advantage (Kaplan Financial Knowledge Bank, 2021).
Subjectivity in Estimates:
Many financial statements rely on estimates, which can introduce subjectivity into financial reporting. For example, calculating depreciation, provisions for bad debts, or the fair value of assets requires assumptions that could vary depending on the company’s management. These estimates can lead to biases or misrepresentations if not applied consistently or with adequate transparency (Article Library, 2023). Such subjectivity can influence the reliability of financial data, especially in volatile or complex industries.
Static Snapshot:
Financial statements provide a snapshot of a company’s financial position at a specific point in time. They do not capture the dynamic nature of business operations or reflect the timing of cash flows. A company’s financial status can change rapidly due to market fluctuations, unexpected events, or operational changes. As a result, financial information can quickly become outdated or irrelevant for ongoing decision-making (Accounting Tools, 2023).
Key Stakeholders Interested in Financial Information
Investors:
Investors rely on financial information to evaluate a company’s profitability and growth potential, helping them decide whether to invest or divest. Shareholders may particularly focus on dividend trends and earnings stability when making these decisions (Laux & Leuz, 2020).
Employees:
Employees are interested in a company’s financial information as it provides insights into job security, wage trends, and potential for advancement. Financial stability can influence their confidence in the company’s ability to meet long-term obligations, including salaries and benefits (Brigham & Ehrhardt, 2022).
Lenders and Creditors:
Financial data is crucial for lenders and creditors to assess the risk of lending money. They evaluate liquidity ratios, debt levels, and repayment history to gauge whether the company can meet its financial obligations.
Customers:
Customers, particularly those in long-term relationships or with large contracts, assess a company’s financial stability to ensure continuity of service and supply. A company in financial distress may struggle to meet customer demands, creating risks for buyers (Atrill & McLaney, 2022).
Government and Regulators:
Governments and regulatory bodies monitor financial information to ensure that companies comply with tax laws and financial reporting standards. Accurate financial reports contribute to the regulation of industries and protect the interests of stakeholders (Horngren et al., 2021). Lastly, financial information is crucial in decision-making, performance evaluation, reporting and compliance, credit analysis purposes. However, it has shortcomings; it uses past data, and many other factors which cannot be measured in money are left out of the process.
Accounting information and Conventions Used by Organizations
Accounting policies and practices are like a roadmap for organizations to follow in the preparation of their accounting records because they provide structure that provides for accruals, recognitions, classifications, measurements, and disclosures. These frameworks are GAAP or IFRS-financial reporting standards for intentional financial statements.
Accounting Arrangements and Conventions
Accounting arrangements and conventions financial accounting is based on accordance with certain accounting arrangements and conventions that provide a firm, clear, and accurate basis for preparing stabilized financial reports. These principles give the ability to business to report this aspect of its financial information in a format that is easily understood and in a format that is easily compared period to period and from one entity to another. These guide can either be GAMP or IFRS or prove very essential for ensuring that the financial statements prepared are accurate and can be relied on.
Key Accounting Arrangements
Accrual Basis Accounting: Accrual basis of accounting is one of the most popular accounting methods and is central to IFRS as well as GAAP accounting. One of the requirements of this method is that revenues shall be reported at the time that they are earned while expenses shall be reported and recognized at the time they are suffered regardless the cash flow resulting from the two occurrences above at the indicated time occurred or not. For example, actual revenue in form of sale is arrived at the point of sale regardless of time of receipt of payment. Of course, expenses are also recognized when they are incurred and not when payment is made. This approach gives a better and detailed position of a company in its financial stability than cash basis of accounting method, which only acknowledges profits when cash is made or paid (IFRS Foundation, 2023). The accrual method is more so common for businesses that have credit sales or expenses where revenues or costs are recognized over time.
Double entry system: In this system, each financial transaction impacts at least two accounts in a manner that maintains the accounting equation stated below: Total assets = total liabilities + total equity. For instance if a firm buys goods on the basis of credit, it increases the original equipment manufacturers’ account and concurrently increases the accounts payable. Besides increasing accuracy, this system also has an added control feature of checking and detecting possible errors or fraud. The double-entry system is the framework for contemporary accounts and is an important requirement of both GAAP and IFRS (Atrill & McLaney, 2022). It safeguards the stake of a venture by making sure that the overall worth of a business in terms of money is accurately reflected in the balance sheet where every fluctuation in the value of the assets is matched to corresponding variances in the value of liabilities or shareholders’ fund.
Segment Reporting: Segment reporting is one of the significant agreements for companies with segmented operations or divisions. As with the disclosure of financial information, both GAAP and IFRS demand information from individual business segments in order to offer more clarity concerning the organization. This approach assists investors, analyst, and all the stakeholders of the business to evaluate the performance of the segment that might have different risk, growth, and profitability level. With the help of financial results segmented by business divisions, more detailed and accurate picture about the overall financial condition of the company and its divisions can be given to external and internal decision makers and evaluators. Segment reporting is especially relevant for conglomerates, or multinational companies, where separate business segments may be involved in totally unrelated activities (IFRS Foundation, 2023).
Accounting Conventions
Conservatism: The conservatism principle insists that accountants should be very careful when recording financial returns especially in situations of Accent. According to this convention, accounts should take the probable losses or liabilities to the account as soon as it is possible but should only take the gains to the account when realized. They say this principle can protect businesses from inflating their balance sheets by understating the risks attached to these assets (Investopedia, 2023). For example, in inventory valuation, if the market price of inventory drops below its cost, the loss is recognized immediately, even if the inventory has not yet been sold. This approach ensures that companies do not overstate their assets or net income.
Consistency: The consistency principle ensures that companies apply the same accounting methods from one period to another. This is essential for making financial statements comparable over time. If a company changes its accounting methods or estimates, it must disclose this change and explain the reasons for it in the notes to the financial statements. Consistency allows investors and other stakeholders to compare financial data from different periods and make more informed decisions (Atrill & McLaney, 2022). For example, if a company switches from one depreciation method to another, it must explain how the change affects the financial results and why it was made.
Materiality: The materiality convention dictates that financial information should only include items that are significant enough to influence the decisions of users. In other words, insignificant details or minor transactions may be omitted if they do not have a substantial impact on the financial statements. This principle ensures that financial reporting remains efficient and focused on the most important information. A historical material item is one whose absence or wrong representation would make a user alter their economic decisions based on the financial statements (Kaplan Financial Knowledge Bank, 2021). For example while reporting an insignificant expense an error may not be material, a large error in reporting the revenue is very likely to distort the decision-making process.
Full Disclosure: The full disclosure principle requires that all information – both financial and non-financial affected by the management, useful to user’s decision-making whether or not they are unfavorable for management and the enterprise, needs to be disclosed. This convention plays a crucial role in establishing the trust with stakeholders that seeks to receive the information, including investors and creditors, as well as regulators (IFRS Foundation, 2023). Full disclosure entails companies to give detailed accompanying notes on the analyses of financial statements and give details on events, changes on accounting policies or risks that have not been captured by figures. For instance, a group engaged in a law suit or under investigation by the regulatory regime must state such matters in its accounts since they may significantly affect the business’ operations in future.
Example of Conventions in Practice
The local building convention Utility of conventions; the convention of freehold tenure Convention and easements, the doctrine of unconscionable dealings, Markets as conventions Ronald Harmans concept of conventions. Both quantitative data and compliance to every accounting standard is significant in enhancing the correctness, reliability and credibility of financial information. Though there are some weaknesses some of which include, the use of technology and the shift to International Financial Reports Standards have helped reduce those traditional problems. Not only shareholders but these ideas protect all the organizations also, helping them make the right strategic choice.
Reference
Investopedia. (2024, June 15). Why do shareholders need financial statements? Investopedia. https://www.investopedia.com/ask/answers/032615/why-do-shareholders-need-financial-statements.asp
MBA Knowledge Base. (2024, May 10). Importance of financial information to stakeholders. MBA Knowledge Base. https://www.mbaknol.com/business-finance/importance-of-financial-information-to-stakeholders/
Cash Flow Inventory. (2024, December 1). The importance of financial statements: A comprehensive guide. Cash Flow Inventory. https://cashflowinventory.com/blog/financial-statements/
Accounting Insights. (2024, July 20). Financial information: Key to decision making and strategic planning. Accounting Insights. https://accountinginsights.org/financial-information-key-to-decision-making-and-strategic-planning/
Harvard Business School Online. (2020, March 5). How and why managers use financial statements. Harvard Business School Online. https://online.hbs.edu/blog/post/how-managers-use-financial-statements
UK Essays. (2021, August 14). Importance of financial information to stakeholders. UK Essays. https://www.ukessays.com/essays/accounting/importance-of-financial-information-to-stakeholders-accounting-essay.php
Accounting Guide. (2024, September 30). How financial statements are used by stakeholders. Accounting Guide. https://accountinginsights.org/financial-reporting-a-tool-for-informed-decision-making/
Alpine Mar. (2024, November 25). Why are financial statements important? Alpine Mar. https://alpinemar.com/blog/importance-of-financial-statements/
Hero Vired. (2025, January 10). Importance of financial statements. Hero Vired. https://herovired.com/learning-hub/blogs/importance-of-financial-statements/
EnKash. (2024, October 5). Financial statements: Meaning, importance, benefits, scope, and objectives. EnKash. https://www.enkash.com/resources/blog/financial-statements-meaning-importance-benefits-scope-and-objectives/