The need for financial information

Characteristics of useful financial information Credible - The credibility assumes that the accounting information does not comprise any significant error or subjectivism and it offers a faithful image of the mirrored processes. The accounting information must be objective (to faithfully mirror the transactions and events), must reflect the meaning and consequences of the economic events just as the legal requirements, it has to be neutral (to avoid influencing a decision or issuing a judgment for the accomplishment of a pre -determined outcome or objective), it must be complete and illustrated within the limits of cautiousness

Characteristics of useful financial information Transparent - The extent to which investors have ready access to any required financial information about a company such as price levels, market depth and audited financial reports. Classically defined as when "much is known by many", transparency is one of the silent prerequisites of any free and efficient market. When transparency relates to information flow from the company to investors, it is also known as "full disclosure".

Timely and reliable Timely and reliable financial statements preparation creates confidence, credibility, reliability and business awareness of the owner and senior management in the eyes of bankers and other financial institutions and investors who provide cash and working capital to the business.

Understandable and Comparable Comparable - Accounting information and financial statements should be equipped in such a way as to assist assessment of entity information during time and also alongside information from different, but similar, entities. Comparability results when different enterprises apply the same accounting management to similar events. Compliance with international accounting standards helps to enhance comparability Understandable - This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities Accounting information and financial statements should be prepared in such a way as to facilitate understanding by users of the financial statements.

Usefulness of financial information in identifying trends The general direction of a market or of the price of an asset. Trends can vary in length from short, to intermediate, to long term. If you can identify a trend, it can be highly profitable, because you will be able to trade with the trend.

How managers use financial information Strategy Formulation Strategy Implementation and Management

Discuss the usefulness of financial information in contracts Financial statements are used in many ways, most notably to monitor and analyze the profitability of a business both internally by its management and externally by shareholders and other interested parties. But an important specific role of financial statements is that they are used in various contracts and agreements. For Example A limit to the amount that a company may borrow may be based on ratios taken from the financial statements, such as gearing, interest cover or other measures. If such limits are breached, various consequences may arise including the debt being immediately repayable. In an agreement for the sale or purchase of a subsidiary, the price to be paid may include an initial amount plus a further amount of contingent consideration that may be payable depending on the level of profits in the period (typically one to three years) after the sale

Performance Activity Explain to the students that as financial managers, it is important that they grasp the importance of financial information to individuals both inside and outside an organization. Ask each team to conduct secondary research to develop a one-page written report or presentation that answers the following questions: How do financial managers use financial information? Who else in the company needs financial information? How do those individuals use the financial information? Who outside the company needs financial information? How do they use the financial information? What characteristics must financial information possess to be useful?

Performance Activity Start Now Portfolio: Buy What You Know. Explain to the students that their most comprehensive project as financial managers is the Start Now portfolio project. The initial step of that project is to create a list of companies that the team members would like to investigate as possible investment opportunities for their employer. Using the activity sheets Buy What You Know (pp and 5-46), each team brainstorms a list of companies to study based on products and companies with which team members are familiar. There are no other guidelines. Team members must then verify company names and that the companies are publicly traded in the United States. Each team should end up with a list of eight or ten companies (two per team member).