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Professional accountants have defined accounting as a system of recognizing, classifying and availing the relevant financial information which are necessary for decision making in the company. Furthermore, accounting records help in providing information to the tax authorities and the auditors who are visiting the company.
It is not possible to estimate the financial position of a company without information recorded in the books of accounts. It is therefore, important to keep the records of day to day transactions as a means of controlling the assets of the company and estimating the cash flows.
There are four basic financial statements in every company and these include the balance sheet, income statement, retained earnings and cash flow statement. For the normal running of the company, the financial statements help in providing information about the company to its clients such as investors, banks as well as donors. This information is very useful in understanding the financial position of the company at all time (J. Madura, 2011).
It is consistent since they all give detailed information about the company in terms of gain, loses, liabilities, shareholders-equity and assets of the firm. With this information at hand, the company can take decisive measures as per the out come of the findings e.g. creating more profitable assets for the company in case the outcome of the findings are positive and are up to the expectations of all the company’s stakeholders, managers, investors, creditors and employees. This can be achieved together as a team whereby each participant is expected to be optimistic of the company’s good fortune all the time (J. Pratt, 2011). This process may take long to achieve since it involves risk taking. This may result into attraction of more investors, result- oriented managers, good creditors and of course a feeling of job security to the employees in the company. In case of a big blow to the company, the first suspects are the managers as they are the ones at the helm of management. Such a move usually scares away the investors and as a result, the company may result into cutting on some of its expenditures which may result into sacking of its employees to maintain their assets both within and outside the company.
Companies listed in stock exchange market are always required to produce updated financial information for the investors and other interested parties to make comparison on the performance of the company with its competitors. This is very important since the investors will be in a position to identify which company to invest in. The following parties are, in one way or another, affected by the company’s financial information.
Managers use the information obtained in accounting records to compare the sales and the expenses incurred during the trading period. Such analyses help in identifying the profitability of the company in different trading periods. They should not only be keen incase of any changes but also analyze the balance sheet so that they can know the behaviors of the assets verses liabilities (J. Pratt, 2011).
Investors are mostly interested in knowing or estimating the returns incase they invest in a certain company. Investors are amongst the main sources of capital to the company through the sale of shares. Furthermore, they are much interested in knowing the movement of stock and the statement of stakeholders’ equity.
Creditors provide capital to the company though they operate under condition and through the analysis of the financial statement of the company. They thoroughly analyze cash flow statement, balance sheet and income statement before lending. The income statement shows the liquidity of the company while the balance sheet compares the assets of the company and the liabilities. Creditors are very interested in the cash flow statement because it shows the commitment and the ability of the managers to mange the company’s resources (J. Madura, 2011).
In conclusion, most companies are forced to produce up to date information in order to attract more investors and other third parties such as banks. It is evidence that the future of the company will most probably be determined by the annual financial statements which will be published in the company’s books of accounts and the business newspapers/journals.