Interpreting Accounting Information and Theory

Question: Disucss about the Interpreting Accounting Information and Theory. Answer: Introduction: Accounting plays a vital role in communicating the relevant financial information to all the stakeholders of the company. Furthermore, accounting plays a vital role in helping the stakeholders to make adequate decisions, which could in turn allow the company to attain higher growth. Christensen, Nikolaev and Wittenberg (2016) mentioned that with ethical accounting system companies are able to depict accurate financial condition in their annual report. Relevant stakeholders that are identified from the situation are disclosed hereinafter. Owners: The first stakeholders that need relative accounting information to understand the overall progress of the business are the owners. Accounting plays a vital role in helping the owners make adequate decision regarding continuation or discontinuation of the business. Moreover, with the help of accounting system owners are able to detect the future prospects and income, which could be generated by the company. In addition, accounting system also allows owners to understand the overall growth, which is been achieved by comparing profits from previous fiscal. Collier (2015) mentioned that accounting system allows owners to detect the profitability ratio, which is essential in detecting actual profitability of the company. In this context, Ismail and King (2014) further stated that accounting information also allows owners to make adequate investing decisions, which could help in improving performance of the company. Managers: The second stakeholders are mainly detected as the managers, which rely on the accounting information to make adequate decision in improving operational capability of the company. In addition, with accounting information managers are able to detect the performance of the company and propose relevant budgets, which could help in reducing overall expenditure. Furthermore, the accounting information also allows managers to detect the excess costs, which are been conducted in the business. Sutton and Arnold (2013) mentioned that managers with adequate accounting information are able to use budgeting strategies, which could help in decreasing the expenses. On the other hand, Nikolaev and Wittenberg (2016) criticises that strict budgeting strategies might reduce cash flow and reduce friction of the decision made by manages. Thus, managers mainly rely in making adequate decisions by analysing accounting reports. Investors: The third stakeholders that rely on the accounting information are the investors, who are keen on understanding the overall progress and growth of the company. Accounting information mainly allows investors to detect solvency condition of the company, which is essential to detect viability of the investment option. Furthermore, investors with the help of accounting information are also able to make decisions, which could help in improving the overall return from investment. Nikolaev and Wittenberg (2016) stated that accounting information mainly loses its friction during economic crises where investment capital is highly at risk. In this context, Ismail and King (2014) furthermore argued that loopholes in accounting system inflate the financial report, which in turn increases the overall risk from investment. Investor mainly uses the accounting report and auditors report to make investment decisions, which in turn reduce the overall risk from investment. Reference: Christensen, H.B., Nikolaev, V.V. and Wittenberg?Moerman, R., 2016. Accounting information in financial contracting: The incomplete contract theory perspective.Journal of Accounting Research,54(2), pp.397-435. Collier, P.M., 2015.Accounting for managers: Interpreting accounting information for decision making. John Wiley Sons. Ismail, N.A. and King, M., 2014. Factors influencing the alignment of accounting information systems in small and medium sized Malaysian manufacturing firms.Journal of Information Systems and Small Business,1(1-2), pp.1-20. Sutton, S.G. and Arnold, V., 2013. Focus group methods: Using interactive and nominal groups to explore emerging technology-driven phenomena in accounting and information systems.International Journal of Accounting Information Systems,14(2), pp.81-88.