The Usefulness Of Financial Statements To Stakeholders

The Usefulness Of Financial Statements To Stakeholders Introduction: Finance for managers is very important subject for businesses. All stakeholders must have to know about it. Because it helps their businesses to run properly and make profit. Finance for managers helps people to know about the purposes and requirements for keeping financial records, what are the techniques for recording financial information, what are the legal and organisational requirements of financial recording, the usefulness of financial statements to stakeholders, what is the difference between management and financial accounting, the budgetary control process and so on. It also helps people how working capital can be effectively managed, how calculate and interpret variances from budget, how to evaluate business project, how business organizations can effectively manage working capital etc. Businesses are mainly depend on finance, managers and budget etc. So if people want to start business they have to know about finance for managers. It helps them to learn some most important things about business. Thats are: what are the legal responsibilities, how to keep financial record, how to control finance, how to control budget, what are the costing and pricing, what are the financial statements, project appraisal methods, usefulness of financial stakeholders etc. Evaluate the purpose and requirements for keeping financial records: In business there are many purposes and requirements for keeping financial records among of those this three are mainly important. Thats are: Legal requirements: It means when people start businesses they need to follow business rules, laws and regulations to run their businesses. Almost every business has some form of legal ruling. Particular forms, licences and other documentations is field with state and local government offices in order to begin. And these documentations may be tax forms, shareholders and payments etc. Without this documentation you may given up from opening. Tax requirements: In every business people must have to pay tax and this tax depends on business structure its called tax requirement. This tax also sometimes depends on business profit, business types, and business quality and so on. Internal control requirements: Internal controls are policies, procedures and mechanisms used to decline business risk. In order to check employees and member from committing a dishonest act the control must be via and wide. It helps business to run properly and to achieve business goals and also help to make good relationship between all business staffs. Analyses the techniques for recording financial information. Analyses the legal and organisational requirements of financial recording: Financial recording is a process and procedure that is used by an organisation to control finance and accountability. This process and procedure include recording, verification and timely reporting of transactions that affect revenues, expenditures, assets, and liabilities. To develop business and making profit accountants have to keep financial records or information. There are some techniques for recording financial information that are given below: Double entry book keeping: It is an account technique which records each transaction as a credit and a debit. Day books and ledgers: A book with an account of sales and purchases made each day is called day books. For example: sales day books, sale return day books etc. On the other hand ledger is an accounting book of final entry where transactions are listed in different accounts. For instance: sales ledger, purchase ledger and general ledger etc. The trail balance: It is totalling of debit balance and credit balance to make sure that total debits equal total credits. From the trail balance figure end of the year an organization can make balance sheet of the business to show the financial position at a particular moment in time. Manual and computerised systems: Manual systems means those transactions are enter manually in business. It is a risky system for business because there are many chances to make mistakes. On the other hand those transactions are enter by computer is called computerised system. It is a very safety system and never makes mistakes. Nowadays most business systems are computerised systems. Because it can also keep more records than manual system. In business there are some requirements for financial reporting and these financial reporting requirements are for sole traders, partnerships, limited companies and public limited companies etc. Financial reports are the documents and records that how much money your business is making or not or how much money your business have to pay or how much money your business already paid etc. Basically it is the documents of money transaction of all purposes that where your business invest money. There are different types of financial reports or statements. These financial statements can be cash flow statement its a summary of the actual incomings and outgoings of cash in a firm over an accounting period (month, quarter, year), it can be also profit and loss account it shows your business that how much money is your profit or loss. And the final statement is called balanced sheet. It focuses on what asset the entity owns, how it paid for them, how much profit or loss etc. This statement is p repared at the end of the year. The purpose of financial reporting is to deliver this information to the lenders and shareowners (the stakeholders) of your business. Because in business we have mainly two types of stakeholders thats: internal and external. Internal means those stakeholders are dwell inside the company for examples: managers, employees, board members etc. On the other hand those stakeholders are not directly a part of a company is called external stakeholders for examples: shareholders, customers, suppliers etc. Financial reporting must be part of the essential contract between you and them. Your lenders and investors have the right to know if their money is being spent wisely and returning a profit. Besides these the usefulness of financial statements are that: by doing this stakeholders can know that how much is their profit and loss, how do assets stack up against liabilities, where did the business get its capital, and how is it making good use of the money, what s the  cash  flow  from the profit or loss for the period, did the business reinvest all its profit, does the business have enough capital for future growth and so on. Evaluates the usefulness of financial statements to stakeholders: In business there are two types of stakeholders thats: internal stakeholders and external stakeholders. Internal stakeholders mean those stakeholders are dwell inside the company for examples: managers, employees, board members etc. On the other hand those stakeholders are not directly a part of a company is called external stakeholders for examples: shareholders, customers, suppliers etc. All shareholders want to see the use of their investment and thus asses the management through the financial statements. Because financial statements are very useful for businesses. The usefulness of financial statements to stakeholders is given below thats are: how much is the profit and loss in their business how much money the invest how do assets stack up against liabilities where did the business get its capital how is it making good use of the money What is the  cash  flow  from the profit or loss for the period did the business reinvest all its profit how much is their costs how much money they paid Does the business have enough capital for future growth etc. Explains the difference between management and financial accounting: Financial accounting is concerned with financial transaction and statements that have already taken place. It is a gathering of information about business transactions. For example: profit and loss. These processes are controlled by finance manager. On the other hand management accounting is concerned with providing management of an organisation with recommendations based on accounting information, in order to help in making day to day decisions and in longer term planning. These processes are controlled by management manager. Financial accounting and management accounting provide information into two different user groups. Financial accounting primarily provides information for external users of accounting data, such as investors and creditors. On the other hand, management accounting provides information for internal users of accounting data. Internal users include employees, managers, and executives of the company. Financial accounting is reporting on historical information. The i nformation is reported regularly. It is often broken down into monthly, quarterly, and annual reporting periods. On the contrary, management accounting information is reported continually. Internal users need to evaluate past, present, and potential future information in order to make decisions. Therefore, these users continuously need information in order to make the appropriate decisions. These two accounts are very important for a business. Without these two businesses cannot run properly or cannot make profit. So always try to keep proper account of these two accounting sector. 5 Explain the budgetary control process: To make effective decisions and coordinate the decisions and actions of the various departments according to the capital is called budget. Because every business have a limited budget so it is necessary to control budget. There are many types of budget in businesses such as: advertising budget, purchasing budget, sales budget, cash budget, development budget etc. There are some process to control budget thats are: Good communication and good coordination between departments and authorities can control budget. Besides this well planning helps managers to decide the most effective ways for controlling budget. On the other hand cash flow forecasts are also helpful to control budget. It shows if a firm needs to borrow, how much, when and how it will repay the loan. However evaluation can control budget. Because it means a manager is to compare the budget with actual performance by each person sector. In here control action is also related. Without budgetary plan running a company is difficult. Budget is also important for management. Because managements are also depends on budget and every departments have its own budget. Among them zero based budgeting can control budget because it is a method of budgeting in which all expenses must be justified for each new period. Its starts from a zero based and every function within an organisation is analyzed for its needs and costs. Budget is then built aro und what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one. Another important process is incremental budgeting. It forecast fixed overhead costs, computed by adding or subtracting a predetermined percentage from the historical costs. There are also some advantages and disadvantages of the budgetary control system. Thats are: It enables the management of a business concern to conduct its business activities in the efficient manner. It provides a yardstick for measuring and evaluating the performance of individuals and their departments. It reveals the deviations to management, from the budgeted figures after making a comparison with actual figure. Effective utilization of various resources like men, material, machinery and money is made possible, as the production is planned after taking them into account. It helps in the review of current trends and framing of future policies. It creates suitable conditions for the implementation of standard costing system in a business organization. It inculcates the feeling of cost consciousness among workers. Budgets may or may not be true, as they are based on estimates. The assumptions about future events may or may not actually happen. Rigidity: Budgets are considered as rigid document. Too much emphasis on budgets may affect day-to-day operations and ignores the dynamic state of organizational functioning. False Sense of Security: Mere budgeting cannot lead to profitability. Budgets cannot be executed automatically. It may create a false sense of security that everything has been taken care of in the budgets. Lack of coordination: Staff cooperation is usually not available during Budgetary Control exercise. Time and Cost: The introduction and implementation of the system may be expensive. Evaluates the use of different costing methods used for pricing purposes: In business there are different types of costs. For pricing purposes industries need to classify there costs. For example: direct costs, indirect costs, fixed costs etc. Each of these costs has separate unit. For pricing and costing a business must calculate unit cost to make sure how much are their costs. Then they have to deal with over heads thats are: raw materials, utility, rents etc. After that they have to make sure about pricing but it is depends on the firms average costs and on the customers opinion of a product value. For pricing purposes some important costs have to be calculated, such as: cost plus, marginal cost, price taker etc. In here they have to identify that which contractor is paid for the costs incurred and is paid an agreed upon percentage of such costs as contractors profit is called cost plus. Besides this a firm have to calculate marginal costs, its allocates only variable costs i.e. direct materials, direct labour and other direct expenses and variable over heads to the production. It does not take into account the fixed cost of production. This type of costing emphasizes the distinction between fixed and variable costs. However most investors are price takers as their actions in selling and buying stocks isnt enough to change the price. Also note that a company can be regarded as a price taker if the price sets and quantity of the goods it produces doesnt have any influence on the actual market price, so forcing the company to go with the market price. Any individual consumer is also considered to be a price taker; this is because the purchase made doesnt affect the price a company sets for its products. There is also an important costing method that is break even it means neither a profit nor loss has been gained, this can be seen after balancing the costs. Conclusion: We can learn a lot of about Business by reading finance for managers. Business is everywhere in the world, it help us to know about the purposes and requirements for keeping financial records, what are the techniques for recording financial information, what are the legal and organisational requirements of financial recording, the usefulness of financial statements to stakeholders, what is the difference between management and financial accounting, the budgetary control process and so on. It also helps people how working capital can be effectively managed, how calculate and interpret variances from budget, how to evaluate business project, how business organizations can effectively manage working capital etc. Its also help u to know what are the legal responsibilities, how to keep financial record, how to control finance, how to control budget, what are the costing and pricing, what are the financial statements, project appraisal methods, usefulness of financial stakeholders etc. From our point of view the most important aspects are finance, budget, stakeholders etc. Failure and success of a business fully depends on theses aspects. There also varies minor aspects to consider also as well, these are also vital to grow your business and gain profits. To grow your business you have look into ways on increasing the amount of sales, both to existing customers and new customers, improving your products and services by researching and testing changes with your customers. Furthermore, developing new products and services, and selling them to new or existing markets, also taking on staff or training your current staff includes working with apprentices and mentors. Lastly you can look for additional sources of funding, such as binging in new investors. To know about businesses very well people have to know about finance for managers because all these things are related here. So it is necessary to learn finance for mangers because it helps quite a lot for businesses.