Accounting is used in different ways, and that includes making managerial decisions. It helps convey and communicate financial reports to shareholders. The reports are then used to make informed decisions for the good of the firm.
Author Alexandra-Daniela Socea summarizes the main ways in which managers can use accounting information to make better decisions for their firms as outlined below:
Accounting information is used for fundamental analysis of a company. The analysis heavily depends on the statement of cash flows, income statement, and the balance sheet. With this information at hand, the investors and the managers gain a deeper understanding of the company’s financial situation.
Accounting information is useful in determining the amounts that can be lent to institutions and companies. Useful financial information such as accounting ratios are derived from financial reports. Creditors heavily rely on debt to equity ratios and Times Interest Earned (TIE) to make important decisions. In fact, no lending institution can give a business a loan without the existence of consistent and accurate accounting information.
Helps managers in corporate governance
Accounting information is useful to the firm beyond the compliance and regulatory hurdles as required by the authorities. It serves as a practical basis for governance within the enterprise. Excellent corporate governance is achieved as managers can create budgets, track efficiency, understand public perception, and analyze business performance alongside developing short and long-term strategies.
In summary, accounting information is useful for managerial decisions in the following ways:
- It helps managers understand what has happened in the past and gives insight to the prevailing situation of the company.
- The information makes events available and visible, which cannot be perceived through the daily operations by the firm.
- It gives a quantitative review of the company.
- It also helps the managers to plan for the future and prepare activities for the company.
It is also worth noting that managers can make decisions based on subjective, and in other cases, irrational elements. However, the existence of intangible, reliable, relevant, and comparable accounting information paves the way for informed managerial decisions.
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