Financial Accounting Essay

1139 Words5 Pages
Financial accounting is one kind of accounting different from the management accounting in the accounting system. As management accounting is for “internal” whereas financial accounting is for “external”. The following is a detailed explanation and analysis of the major objective and role of financial accounting. The purpose of financial accounting is to measure the performance of the entity and therefore provides the financial information to different stakeholders. Stakeholders will have their decision - making according to the financial report issued. James, Arthur and Robert(1978) have stated that: “Most decisions are made on the basis of summary-type reports rather than firsthand information.” A comprehensively summarized…show more content…
Moreover, if the current ratio is too low, it shows that the corporation may have financial difficulty. Moreover, there are also some of the other external users. Their need to receive financial information is not immediate, but also important. As the regulatory body, government is responsible for monitoring different companies so as to maintain the financial stability. More than that, the listed companies which issue their shock publicly usually need to report their activities to the government. The community can distinguish whether the company’s finance is steady through financial report and therefore the community’s feelings can directly influence the image of the company. The employee can use information to know the possibility of bankruptcy of their company to decide whether they should leave the company to prevent the wages. Suppliers may pay attention to the cash flow of the buyers so that they can decide whether provide the trade credit to it. In fact, financial accounting provides a great deal of assistance in efficient resources allocation. It can be explain in “external” and “internal”. “External” means social resources allocation. The effective use of social resources is from entrepreneur and market, but not the government. Companies can use financial statement to induct capital to a correct direction because users will use financial information for the best investment to maximize their benefits. It helps to avoid the loss of resources in the
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