oct3inclass1 (1) - ECONOMICS OF FINANCIAL ACCOUNTING...

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Unformatted text preview: ECONOMICS OF FINANCIAL ACCOUNTING INFORMATION The role of financial accounting information is to facilitate economic transactions and to foster the efficient allocation of resources among businesses and individuals. Perhaps the most familiar transactions involve raising financial capital; in these cases, a company seeks to attract additional financial resources by issuing common stock or debt securities. Here financial reports provide information that can reduce investors uncertainty about a companys opportunities and risks, thereby lowering the companys cost of capital. If you think about this, you can see demand and supply at work. Financial statement information has value either because it reduces uncertainty about a companys future profitability or economic health or because it provides evidence about the quality of its management, about its ability to fulfill its obligations under supply agreements or labor contracts, or about other facets of the companys business activities. Financial statements are demanded because they provide information that helps improve decision-making or make it possible to monitor managers activities. Demand for Financial Accounting Information (Financial Reporting) Explain why each of the following groups might want financial accounting information. What type of financial information would each group find most useful? a. The companys existing and prospective shareholders. b. Company managers. c. The companys current and prospective employees. d. Commercial lenders who have loaned money to the company. e. Current suppliers of products and services. Demand for Financial Accounting Information (Financial Reporting) Explain why each of the following groups might want financial accounting information. What type of financial information would each group find most useful? a. The companys existing and prospective shareholders. a) Existing shareholders use financial accounting information as part of their ongoing investment decisionsshould more shares of common or preferred stock be purchased, should some shares be sold, or should current holdings be maintained? Financial statements help investors assess the expected risk and return from owning a companys common and preferred stock. They are especially useful for investors who adopt a fundamental analysis approach. Shareholders also use financial accounting information to decide how to vote on corporate matters like who should be elected to the board of directors, whether a particular management compensation plan should be approved, and if the company should merge with or acquire another company. Acting on behalf of shareholders, the Board of Directors hires and fires the companys top executives. Financial statement information helps shareholders and the board assess the performance of company executives....
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oct3inclass1 (1) - ECONOMICS OF FINANCIAL ACCOUNTING...

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