Financial Accounting: In an Economic Context

FINANCIAL REPORTING AND INVESTMENT DECISIONS

Financial reporting plays an important role in investment decisions.

1. Profit-seeking companies—Managers of profit-seeking companies prepare reports containing financial information for the owners of these companies. In addition to other information, these reports contain four financial statements: the balance sheet, the income statement, the statement of shareholders' equity, and the statement of cash flows.
2. Owners and other interested parties (users)—Although prepared primarily for the owners, these financial reports are available to the public and are read by other interested parties who use them to assess the financial condition and performance of the company as well as the performance of its managers. Such interested parties, called users in this text, include potential investors, bankers, government agencies, and the company's customers and suppliers.
3. User decisions—Users obtain information from the financial reports that helps assess the company's past performance, predict its future performance, and control the activities of its managers. Financial reports, therefore, help users to make better decisions. Investors, for example, use financial reports to choose companies in which to invest their funds; bankers use them to decide where to loan their funds and what interest rates to charge.
4. Effects of user decisions—User decisions affect the financial condition and performance of the company and the economic well-being of its managers. ...