Financial accounting

Financial accounting plays a major role in the decision making process for a business. For starters, it presents investors with the information they need to analyze the business and assess its financial health to determine whether it is likely to remain profitable. Through it, creditors are also able to check the liquidity of the business and whether it deserves to get financial assistance in the form of credit. Financial accounting is therefore important to a business and greatly assists in the decision making process.

When it comes to making decisions regarding investments, a business can rely on its internal accounting reports such as income statements and balance sheets. The information in these reports helps create a better understanding of the history of a company as well as the state the company stock is in (Gray, 2014). Since the information in balance sheets and income statements is regulated by the Financial Accounting Standard Board, it gives a true depiction of the company and assesses what investing decisions to make.

In the case of determining what to borrow, as well as the likelihood of lending institutions to give out loans, a business can rely on its accounting ratios (Sherman, 2018). Since lending institutions examine a business’ times interest earned ratio and debt-t-equity ratio before taking the liability to give large loans, it is important to first examine the accounting ratios in order to decide on what type of loan to apply for.

Financial accounting is also important as it helps to assess the efficiency within an organization. CEO’s could examine product performance by relying on sales records to determine what products need to be produced more and which ones need to be improved or dropped. Without financial accounting it would be difficult to know which products are doing better than others especially in the case of the Europe branch that deals in a wide variety of products (Latham, 2017). The information further helps to determine what raw materials need to be bought, in what quantity and for what purpose. Instead of just buying products, the financial reports make it easy to identify the products that are doing well and therefore must be in constant supply.

Financial reports for multinational corporations differ from domestic ones in that; multinationals have to abide by the domestic, as well as the international laws and principles set in place to assess the accounts that a business presents. For multinationals, the company has to ensure that its financial reports are in line with the international reporting standards that govern businesses that operate in different countries (Gray, 2014). Businesses operating domestically only have to base their accounting on local rules as is the case with the Generally Accepted Accounting Principles used by companies operating in the United States only. Multinationals have to observe both domestic and international guidelines for financial reporting and this is what sets them apart from organizations operating domestically.

The financial reports that a business has are an ideal depiction of the position the organization is in. they not only make it possible to assess a business’s current position but also give a general idea of what the business will be able to achieve in future. Through the financial reports, it is possible to make decisions that are based on past analysis, present state and expected future outcomes using data tallied from the financial reports. It is therefore important for a business to keep well documented and valid financial reports to make the decision making process run smoothly.

 

References

Gray J, (2014) “International accounting and transnational decisions” London, Boston;     Butterworth, print

Latham A, (2017) “What are the six key differences between multinational and domestic financial management?” retrieved from, https://bizfluent.com/info-8641557-six-       multinational-domestic-financial-management.html

Sherman F, (2018) “Factors that affect a multinational corporation” retrieved from,             https://smallbusiness.chron.com/factors-affect-multinational-corporation-75252.html