Reference no: EM1355538
1. What is the purpose of GAAP and management accounting? There is a very important distinction that we need to keep in mind when discussing accounting because... they are not the same
2. Can you of any example of non GAAP statements that are beneficial to companies and why non GAAP financial statements, may be necessary?
3. GAAP statements have a place and a purpose, but is that purpose always for use in management's decision making process? Or are they just a tool that can be used with other tools, to make good decisions?
4. "Evaluating performance, decision by decision, is costly. Aggregate measures, such as the income statement, are frequently used." How might the wide use of income statements affect managers' decisions about buying equipment?
The income statement is one of the three financial statements, along with the balance sheet and cash flow statement in which provides financial reporting for a company. The wide use of income statements has a vital affect on managers' decisions about buying equipment primarily because the income statement is the company's financial statement that indicates how the revenue is actually converted into its net income. It gives a photo shot of the company's financial standing during the time period being reported, indicating whether they made or lost money during that time. It also highlights the operating expenses for the company. In saying this, management uses this information to determine the operating performance of the company for various business strategies, such as monitoring and/or amending its budget, to identify unexpected expenditures before amounts are significantly drastic and unable to apply corrective measures, and track extraordinary increases in product returns. Not only does this information pose a vital affect on managers' decisions, but it also does with potential lenders, such as banks for loans the company may apply for, investors, and vendors. A company's financial statement is equally as important as an individual's credit report in ways as it contains financial information which determines a company's credit limits with applying for loans and the interest and terms in which the repayment will consist of. It reports what the company is 'worth' and how financially trustworthy or reliable they are.
You pointed out that the income statement has "vital affect on managers' decisions about buying equipment primarily because the income statement is the company's financial statement that indicates how the revenue is actually converted into its net income". You also noted that there are other statements that make up the basic financial statements besides just the income statement. Each of these statements has its own purpose and own set of information that it presents. If you were a manager having to make the decision to purchase a new piece of equipment, would you find the other statements helpful in making your decision?