Answers to Questions
Financial accounting measures, classifies, and summarizes in report form those activities
and that information which relate to the enterprise as a whole for use by parties both internal
and external to a business enterprise. Managerial accounting also measures, classifies, and
summarizes in report form enterprise activities, but the communication is for the use of
internal, managerial parties, and relates more to subsystems of the entity. Managerial
accounting is management decision oriented and directed more toward product line, division,
and profit center reporting.
Financial statements generally refer to the four basic financial statements: balance sheet,
income statement, statement of cash flows, and statement of changes in owners’ or
stockholders’ equity. Financial reporting is a broader concept; it includes the basic financial
statements and any other means of communicating financial and economic data to interested
external parties. Examples of financial reporting other than financial statements are annual
reports, prospectuses, reports filed with the government, news releases, management
forecasts or plans, and descriptions of an enterprise’s social or environmental impact.
If a company’s financial performance is measured accurately, fairly, and on a timely basis,
the right managers and companies are able to attract investment capital. To provide
unreliable and irrelevant information leads to poor capital allocation which adversely affects
the securities market.
Some major challenges facing the accounting profession relate to the following items:
—how to report significant key performance measurements
such as customer satisfaction indexes, backlog information and reject rates on goods
—how to report more future oriented information.
—how to report on intangible assets, such as market know-how, market
dominance, and well-trained employees.
—how to report more real-time information.
In general, the objectives of financial reporting are to provide (1) information that is useful in
investment and credit decisions, (2) information that is useful in assessing cash flow
(3) information about enterprise resources, claims to those resources, and changes in
them. More specifically these objectives state that financial reporting should provide
that is useful to present and potential investors and creditors and other users in making
rational investment, credit, and similar decisions. The information should be
comprehensible to those who have a reasonable understanding of business and
economic activities and are willing to study the information with reasonable diligence.