ACC5000: Financial Report's Role in Decision Making Analysis

This essay examines the crucial role of financial reports in informing business and investment decisions. It begins by defining financial statements and their purpose, emphasizing their importance in presenting fiscal activities and the financial position of an entity. The essay then identifies various users of financial reports, including owners, investors, creditors, and the government, highlighting their diverse information needs. It delves into the components of financial reports, such as income statements, balance sheets, and cash flow statements, and explains how the information contained within them is used to assess a company's performance, creditworthiness, and risk. Furthermore, the essay explores how investors use financial statements to make investment decisions, emphasizing the importance of balance sheets, cash flow statements, and statements of owners' equity. It concludes by reiterating the significance of financial reports in aiding informed decision-making for various stakeholders. The essay references key financial accounting concepts and relevant literature to support its arguments.

Running head: ACCOUNTING APPLICATION
Accounting Application
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Introduction:
Financial statements are considered as the formal records containing fiscal activities
and defining the situation of business, individual or another entity. Appropriate fiscal
information is needed to be presented in an organised way and in such form which is easy for
understanding (Maynard, 2017). The main purpose of financial reports is to offer info
regarding the “financial position”, “performance” and variations in the position of the
company that are considered useful for wide variety of users in undertaking financial
decisions. The purpose of this essay is to discuss regarding the essence of financial reports in
decision making and its importance to every users.
Discussion:
The users of fiscal reports generally includes the proprietors, stakeholders, creditors,
suppliers, personnel, consumers, government, suppliers and common public. The different
users have different type of financial requirements. The owners and investors requires the
fiscal info to assess the capability of the company for success and profitability. While the
lenders require financial information in understanding the capability of the enterprise to pay
the liabilities on maturity (Carlon et al., 2019). The suppliers require financial information in
determining the capability of the business to pay the debt when it becomes due. They are
normally interested in evaluating the ability of a business to pay its short-term commitments.
The government generally require the financial information for the purpose of taxation and
regulatory purpose. Finally, the general public require the financial information to decide
whether they can suggest the enterprise’s security to their clients.
As a general rule, the financial reports usually comprises of the wide-ranging
depiction of the company or the industry in which it is operating. It also consist of the audited
reports of income, “financial position”, “cash flow” and notes to financial reports offering

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details for numerous line of items (Weetman, 2019). Financial information are considered
neutral, they offer an accurate picture regarding the activities of business over the well-
defined period. The business manager later assesses the data to undertake operating decisions
as whether the business is in position of freeing up the present cash for operational
expenditure or requires an added credit. The information contained in balance sheet drives
numerous decisions such as whether the company should emphasize on changing its credit
policy or should emphasize on streamlining the collections in order to resolve majority of the
receivables inside thirty-days.
While fundamental analysis is reliant heavily on the “balance sheet” of the company,
“cash flow statement and income statement”. Investors use the information contained within
the “financial statements” to take decisions concerning the valuation and creditworthiness of
the organization (Wahlen et al., 2014). Without the information of financial accounting,
investors would have lesser understanding regarding the history and present financial health
of stock and bond issuers.
The financial reports are linked with each other. The financial accounting is
considered important for lenders since financial statements provides an outline of all the
assets, the short-term and long-term loans. This helps the users and lenders to obtain a better
sense of an organization’s creditworthiness (Harrison et al., 2014). In the long run, the users
of financial information wants to know the amount of risks that is involved by money to the
company that can be ascertained by reviewing the financial statements of the company. Once
it is determined, the lender will be better able to understand the amount of money it wants to
lend exactly and at what rate of interest.
The perspective investors uses the financial statements to conduct financial analysis
which acts as the basis of making their decisions either to make investment or not to make

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investment in the business. To make an investment decision, investors may use the “balance
sheet” as the finest report to obtain a better complete understanding of the enterprise’s
financial position for buying shares. Their decision of purchasing shares may be dependent
on equity or net worth (Hoyle et al., 2015). A higher amount of net worth might show that the
business is comparatively free from debt, especially if the equity of owners is greater,
expressed as the percentage of assets, then the other companies operating in the same
industry.
In business, to determine the different aspects of company’s financial performance,
cash flow statement is important. Investors can consider cash flow as suitable information
when taking an investment decisions (Schroeder et al., 2019). As a common rule, a stable or
rising cash flow implies that the enterprise can cover its short-term debt expenses and
expenditure, whereas also keeping the long-term debt commitments. Characteristically an
active cash flow statement is considered constructive for investment as it shows the investors
the risk or loan defaults and insolvency.
To base the decision for investment, the “statement of owners’ equity” acts as the
primary report to showcase the trend in the retained earnings for an organization. “Retained
earnings” is viewed as the “accumulated profits” which is not paid out as dividends
(Williams & Dobelman, 2017). This is considered as useful in making investment decision
since higher amount of retained earnings relative to dividends implies that an investors gets
lower dividend income
The income statement provides the important financial information. The financial
statement is considered vital because it reveals the ability of an organization to do business
and to produce profit. Furthermore, the information that is listed in the income statement is
considered highly important in respect to present dollars. Hence, the income statement

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presents a reasonable amount of accuracy. The statement is helpful in showing the amount of
profit an organization has made during the given time. The income statement is viewed vital
because it helps in determining the ability of the company in its basic profitability,
particularly when it is compared with the previous periods or other firms that are operating in
the same field. Rising income is viewed as good sign.
Conclusion:
On a conclusive note, the financial reports serves as the great importance since it
helps the higher management, business and investors in undertaking important financial
decisions. The essay clearly highlights that users of financial reports are very much reliant on
it for making decisions for wide variety of reasons.

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References:
Carlon, S., McAlpine-Mladenovic, R., Lee, C., Mitrione, L., Kirk, N., & Wong, L.
(2019). Financial accounting: Reporting, analysis and decision making. John Wiley
and Sons Australia.
Harrison Jr, W. T., Horngren, C. T., & Thomas, C. W. (2014). Financial accounting. Pearson
Education.
Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.
Maynard, J. (2017). Financial accounting, reporting, and analysis. Oxford University Press.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2014). Financial reporting, financial
statement analysis and valuation. Nelson Education.
Weetman, P. (2019). Financial and management accounting. Pearson UK.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific
Book Chapters, 109-169.