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Peer one8-1 Discussion Financial Statement ConfidenceContemplate how management.

 
Peer one8-1 Discussion Financial Statement ConfidenceContemplate how management

systems and accounting information can aid organizational decision-making.

The management systems and accounting information are data-driven to give insight to what the company’s progress. 

“Managerial accounting information is used by company management to determine what should be sold and how to sell it.” (Freedman)

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Determining what should be sold and how to sell will help in implementing a good marketing strategy.  Combining this with relevant cost analysis will help to determine which products to sell and to whom.   If managers did not have access to this information, it would be like trying to selling cars to the blind.  

Share what tips or suggestions you would provide to peers to encourage confidence when reviewing financial statements for the first time.

My thoughts of reviewing financial statements after the first time is the same as when we learned to read the alphabet and words.  It takes practice, practice and more practice—the more documents are reviewed the more familiar you become–building a better understanding and confidence.

Also, if all else fails, the internet is a great research tool.  It can help you to better understand what you are viewing.  For example, the balance sheet— “Think of it this way: if you liquidated all of your assets and then paid off all the debts you owed, the amount left over would be your “owner’s equity”. (Youderian, 2013)

Additionally, are there any resources that come to mind that would help a “beginner” to review and comprehend financial statements?

The US Securities and Exchange Commission (SEC) offers a guide that will help beginners to better understand financial statements.  An example of the clear, concise language that is used to clarify the statements and their functions.

“There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash flow statements show the exchange of money between a company and the outside world also over a period of time. The fourth financial statement, called a “statement of shareholders’ equity,” shows changes in the interests of the company’s shareholders over time.” (SEC)

References:

  • Beginner’s Guide to Financial Statements, https://www.sec.gov/investor/pubs/begfinstmtguide.htm
  • Youderian, Andrew; How to Read a Balance Sheet (The Non-Boring Version); http://www.ecommercefuel.com/how-to-read-a-balance-sheet/; 2013OCT17.
  • Freedman, John; Why Management Accounting Is Important in Decision-Making;http://smallbusiness.chron.com/management-accounting-important-decisionmaking-53947.html.

 Peer two

8.1 Financial statements, – standards and dataCOLLAPSE

     Three things that will affect your decisions based on your companies financial information is industry standards, historical data, and the type of accounting standard used for your financial records.

     Accounting information cannot help management with any decision making unless there is something to compare it too.  All the pertinent accounting data is just numbers unless there is a benchmark or historical data for comparison.  For instance knowing the industry standards for return on sales is a benchmark for your company’s return on sales. This is important because the industry, as a whole, will be affected the same way as your company has been affected for the same time.  This doesn’t mean that the same impacts (supply, regional, or political) will affect other companies the same as it has your company. The effects of the economy (depending on region) are the same across the board (positive and negative) will affect your companies financial ratios. For example, your company pays the same price for fuel for its trucks delivery goods as your competitors which affects the local economy. The difference is that your company is more socially responsible and utilizes more modern fuel efficient trucks so the cost is less to deliver the same amount of goods which gives a better return on operational cost.  So while most companies pay a higher overhead for fuel consumption your comparison against the industry puts your company at a better standard.

     Industry standard is important as a comparison in the market. To measure the effect of a company’s strategy from year to year you need to compare the books against its historical accounting records. Short term and long term strategies are critical in a company’s future to make a profit.  However, knowing how the strategy is working is dependent on the accounting information compiled over many years.  For instance, your company has been in business for a long time in the clothing retail market.  Its track records for stores in different states is well known from when they open to when they become substantiated and earning a profit for the corporation.  New stores who enter the market in a new area has base line accounting information that is essential to management to determine how well it is doing compared to other stores when they opened. Maybe a new distribution warehouse needs to be opened to cover the region due to the short term inventory being inadequate to keep stock on the shelves. Or it may be as simple as an increase in shipments to ensure stock is on the shelves for the customers. Comparing historical accounting data to current information gives management another tool to make important strategic and operational decisions.

     Lastly accounting records need to be compiled the same year after year or the information will be corrupt and unusable as comparison. Today, most if not all corporations comply with the SEC accounting reporting standards of the generally accepted accounting principles (GAAP).  Due to company’s like Enron, fancy reporting measures to hide a company’s profit and loss statements to keep the shareholders off balance is a thing of the past.  Also, a company has to compare the same information against itself for accuracy.  Current assets and liabilities can only be compared to the same accounting information year after year.  For instance, you cannot compare liabilities of leased vehicles and rent from one year and exclude the rent from properties the next.  Like comparisons give the best information to make the proper decisions.

Regards,

Jason

 
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