Role of Financial Accounting in Management & Decision Making

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  • 0:04 Defining Financial Accounting
  • 1:08 External Users
  • 1:48 Internal Users
  • 3:09 Useful Information -…
  • 4:28 Lesson Summary
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Lesson Transcript
Instructor: Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

In this lesson, you will learn why financial accounting is important to managers and other decision makers. You will also understand the necessary components of financial accounting for managers.

Defining Financial Accounting

You are the new general manager of a business, and you're wondering how much you should invest in your financial systems and accounting personnel. After work you stop at a bookstore to find something to read on the topic. Picking up a business book, you see the phrase 'accounting is called the language of business.' This certainly gives you pause for thought.

This may come as a surprise, but most successful business professionals value the true importance of accounting. Financial accounting provides important information for almost all business decisions. Ignore your accounting systems and data at your own risk!

The accounting process records, accumulates, and communicates information about the activities of an organization to its users. Financial accounting allows masses of data to be summarized into information useful to decision makers in an organization. This usable information includes the financial statements that summarize operations, financing, and operating activity for a particular period of time. It also reports the organization's financial condition at the end of the period.

External Users

We can broadly classify the users of an organization's financial information into two categories: external and internal users. Examples of external users are:

  • Various governmental agencies, including taxing and regulatory authorities
  • Vendors, who need financial information to make credit decisions concerning your company
  • Customers, who use financial information to determine if your company is viable in the long run
  • Lenders, who provide necessary loans and credit enabling your company to finance its operations

This already impressive list is by no means all-inclusive, either. There can be many more external users of your company's financial information.

Internal Users

Internal users are the most frequent users of a company's financial information. This group principally consists of company management, starting right at the 'C-Suite' of management with the chief executive officer (CEO), chief operations officer (COO), chief financial officer (CFO), and other senior managers, such as the chief information officer (CIO). The executive management of the company not only uses financial accounting data to make strategic decisions, but also often has its compensation tied to the earnings of the company.

When compensation is tied to company performance, the top executives are very aware of operations and company finance. It provides incentive for active management of the company. Inventory valuation, credit policy, and making decisions such as lease versus purchase are directly tied to information produced by the financial accounting system.

Other internal users of financial accounting information, often the middle management of the company, include:

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