Essay Example: Accounting Information Illuminates the True Performance of a Company

The illumination of a companys true and evident performance level is wholly dependent on the accounting information offered from the records of the company (Hines, 1988, 251). Based on the illuminated information, the company, its internal and external stakeholders, investors among other sole proprietaries can make proper and well-versed decisions concerning the fate of the companys future with regards to their plans. Consequentially, the true nature of a business performance can help the company in determining whether it needs to restructure both its short-term and long-term goals. Therefore, it is of absolute importance for a company to not only account but to also keep a record of all its accounting information to help in its endeavors. Thus, this paper aims to shed in-depth light on the statement concerning the illuminating nature of accounting information for companies through critical evaluations as well as illustrations.

Theoretical Background

People often discuss issues regarding accounting and its impact on a firm (Berry, Capps, Cooper, Ferguson, Hooper & Lowe, 1985, 11). While discussing this, some of them always end up invoking economic theories as a means of supporting their truths. However, it is invalid only to invoke the various concepts of economics just to defend one's point of argument and meanwhile fail in invoking let alone exploring accounting. Accounting is a field that has been explored in little measures as compared to other economic fields. Evidently, the failure to explore the different concepts of accounting has failed in understanding the implications that accounting information has on companies, their future as well as their development among other aspects in their entirety (Morgan, 1988, 479).

Notably, accountants and economists often see things in totally different ways. For instance, accountants instill massive efforts to calculate the depreciation history of fixed assets while economists only look into the results and ultimately, offer comments dismissively. Surprisingly, those involved in the debates concerning financial reporting and its effects on the company, more so, on how it reflects the true nature of the business often derive their thinking from various economic branches. They do so to either justify new thoughts concerning the issue or to defend the existent practices. Therefore, before determining the need for accounting practices in the firm, there is a great need to determine the impact that accounting information has on the firm and its practices in its entirety.

Determining this requires an in-depth understanding of the aspects of accounting in the firm and the categorical effect that accounting information holds on the firm's direction (Davis, Menon & Morgan, 1982, 312). Importantly, a company requires to understand the level of its performance and whether or not it is lagging or climbing the ladders of success. Without such understanding, it becomes hard for the company to make any important decisions since every decision it makes affects the company in one way or the other. Ultimately, it is vital to understand and relate different aspects of accounting with regards to economics. For instance, garner understanding on the relevance of behavioral economics on accounting. Moreover, it is vital to understand whether other economic theories such as the agency theory tend to trump financial economics and its importance or inadvertently the opposite occurs. Ultimately, it is critical to understand that different economic theoretical approaches concerning accounting issues may either offer support to these issues or may inadvertently lead to the opposite direction.

The importance of Accounting Information to Users

Advantages and Drawbacks of Each User

Shareholders

Accounting information is important for shareholders of a company because they help them to evaluate their investment. They can understand the company's financial statements and hence make informed decisions as to how they should vote on corporate matters. Shareholders have the biggest stake in the company, and therefore they have every reason to know its financial status. By evaluating accounting information, shareholders get a chance to examine the company's financial performance. This information helps them to understand whether the resources are being used in a way that is adding value to their investment. Moreover, accounting information helps understand the financial position of the company, its current position of assets against liabilities.

The major drawback of accounting information to the shareholders is the fact that more employees are required to monitor and draft financial records. This means that the company will have to employ accountants hence incurring further expenditure.

Directors

Accounting information offers directors important data that is needed to determine whether a company is making a loss or profit, how much the company owes others, how much debtors owe the company and other crucial financial information. Accounting information serves as an important tool that helps directors' measure business transactions and hence makes appropriate changes to help steer its operations in the right directions with solid information. It gives them a clear roadmap on where they should go without having to guess what is needed to get done. For instance, by analyzing accounting information, directors may notice the prevailing trend of sales is decreasing; this information then helps them take measures that can reverse the trend.

The drawback of using financial information to gauge and monitor the company's stability may not be appropriate for directors to act proactively. This is because by the time accountants assembles and draft financial information, the company would have experienced the consequence of poor planning or a negative action carried out before unexpected loss.

Government

Accounting information is of paramount importance for the government as it helps supply financial records of companies to be able to make fiscal as well as monetary policies. This information helps the government regulate income tax reporting of businesses effectively. The recorded accounting information enables the government monitor financial activities of companies to ensure it is accurate and a true reflection of its position (Chalmers 1976, p. 30). It gives the government a clear mandate of how they should regulate financial activities by checking whether companies underpay or overpay their taxes. With this information, the government maintains proper financial information that does not cause any negative consequences on the tax return policy.

Despite the government gleaning beneficial information from companys financial records, these records may not be accurate. The companys accounting information systems may be drafted in an inaccurate format intended to solicit financial gain. Companies involved with these kinds of fraud activities may not be able to pay all the required taxes which ultimately will negatively affect the government tax policy.

Employees

Providing constant accounting information to employees helps them make appropriate decisions regarding the operations of the company as well as their long-term stay within the company. If a company does not keeps and disclose to its employee's accurate accounting information will, in the long run, lose credibility with its workforce. Particularly, employees whose retirement accounts are managed by the company rely on its financial information to ascertain whether the company would be able to adhere to their fiduciary commitments (Shaoul1997, p. 15). Also, employees will base their long-term commitment on the financial viability of a company, once they are assured a company would be able to sustain itself financially, they become ready to invest their time and skills.

The major drawback of accounting information to measure the viability of a company is the inability by most employees to understand its complexity. Usually, financial information systems are comprised of several components that some employees may not easily understand. Even when they understand how it works, in most cases they do not fully comprehend what the financial system is capable of.

Tax Authorities

Tax authorities require companies to carry financial accounting, which implies that they adhere to the set requirements of regulatory agencies. As such by adopting the appropriate accounting information, companies avoid disciplinary action or unnecessary fines. This information serves as an element of transparency which tax authorities uses to levy taxes as required by the laid down tax policy (Berry et al.1985, p.24). Using this information, tax authorities can understand the financial position of a given company before and after taxes are deducted.

The drawback of only assessing accounting information of a company without examining other metrics may lead to an apparent failure by the tax authorities to understand the accurate and correct financial standing of a company. As such they may levy taxes that are way below the accurate financial viability of a company.

Customers

Customers usually pay close attention to accounting information of company when they want to assess its financial position, especially when they would like to commit themselves to their products and services. In this way, customers understand the nature of involvement with a given company. The companies with appropriate financial position attract a wide customer base that is ready and willing for a long-term commitment (Ross 2015, p.25). On the other hand, companies with poor financial standings attract fewer customers.

However, companies whose financial records are not accurate to give false information to the customers, which without further scrutiny may be used by the customers to their disadvantage. For instance, customers who base their commitment on false accounting information projected by a given company may suffer in the long run as the company may become insolvent unexpectedly without their awareness.

Suppliers

Suppliers are often interested in the companys accounting information for it enables them to ascertain the creditworthiness of the company. Mostly when they are signing terms and conditions for a long-term engagement, financial health of a company is put into consideration. Suppliers first scrutinize the financial viability of business by relying on accurate information given by the company (Tinker 1991, p.60). Suppliers will commit to such businesses for a more extended period, given their financial position is viable and stable, and even they will promptly supply most commodities on credit terms.

In the event, a business gives fraudulent accounting information, suppliers stand a greater chance of encountering loses. This is because suppliers just like other entities that are reliant on accounting information would easily accept the financial position given by companies, and therefore in the event this information is inaccurate their long-term commitment may be negatively affected once the company plunges into unexpected financial turbulence.

The Public

Accounting information projected and given by the companies also serves the interest of the general public. By analyzing financial records of different companies, the general public as external stakeholders gets to understand the overall performance of companies (Hines1988, p.82). This gives them not only a quick grasp of companies' competitiveness in the market, but this information also helps them understand the best company to engage in a long-term investment as a shareholder or as an employee.

Although this information is useful, the p...