Why Are Accurate Financial Statements Important for Outside Business Interests

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Why are accurate financial statements important for outside business interests?

Matt

ACC 205: Principles of Accounting I
Professor Kaplan
Ashford University

December 22, 2011

Accounting is specifically “a system by which economic information is identified, recorded, summarized and reported for the use of decision makers”; however, accounting involves interpretation and analyzing of all financial information, including taxing, personal financial information and investment (Alba, Bathija, & Thonton, 2005). Accounting is defined as the language of business, in that it specifically records the financial data that is required for businesses to operate both efficiently and effectively. Modern accounting includes investigation, forecasting, analyzing, compliance, as well as record keeping and report generation (Gaylord & Ried, 2006). Accounting is said to be a service activity designed to accumulate, measure, and communicate financial information about businesses and other organizations and to provide information for making informed decisions about the business and about how to best utilize resources within the business (Albreacht, Stice, Stice, & Swain, 2008). Accounting leads to the generation of reports and documents, which include financial statements. If accounting is the language of business, then accounting financial statements are the dictionary that defines the terms and the rules of the language (Horngren, Harrison, & Oliver, 2012). Financial statements are a key product of the accounting process as they report on a business in financial terms. In fact, the financial statements that are created by the business can tell the complete story and create an accurate picture of the business that can be used by those outside of the business, such as investors and other businesses, to gauge the health and profitability of the business or to make decisions regarding investing or buy-outs (Horngren, Harrison, & Oliver, 2012). Therefore accurate financial statements are required so that a complete and honest depiction of the business can be created and so that those outside of the business can get and honest and ethical understanding of the business in financial terms. Financial Accounting

Financial accounting is defined as the branch of accounting that is specifically concerned with the preparation of financial statements for use by those outside of the company, who may have very limited access to information regarding the company (Porter & Norton, 2011). Financial accounting differs from managerial or personal accounting in that financial accounting provides information for those outside of the company, while managerial accounting is used strictly by organizational decision-makers in order to make decisions that would affect how the company operates (Horngren, Harrison, & Oliver, 2012). External users, outsiders, are those who are not directly involved in the operation of the business and who may not have day-to-day communication or dealings with the company. Documents Generated

Generally Accepted Accounting Principles (GAAP) is the common set of accounting principles, standards, and procedures that companies use to compile their financial statements. These principles are both authoritatively set standards, in that they are required by law, and commonly accepted ways for businesses to records and report accounting information (Horngren, Sundem, Stratton, Schatzberg, & Burgstahler, 2007). GAAP is the forum in which all companies must report certain financial information to the public so that all companies report consistent financial data that can be understood and compared to other companies and is also used to report financial data to regulatory authorities. GAAP requires that all companies complete and submit four financial statements: the balance sheet, statement of cash flows, income statement, and statement of retained earnings or owner's equity (Horngren, Sundem, Stratton, Schatzberg, &...
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