Analyzing a Company's Financial Health

Essay by kellypostlCollege, UndergraduateA, May 2008

download word file, 8 pages 5.0

Financial accounting develops account information that is used by external parties such as stockholders, suppliers, banks, and government regulatory agencies in their decision-making. Management accounting develops confidential accounting information that is used by managers within an organization. Management accounting is a complex process of identifying, accumulating and analyzing information and then communicating this information to managers to aid in fulfilling organizational objectives. Interpretation of those analyses is also a large component of this discipline. Financial accounting primary produces financial statements, such as profit and loss statements, statements of cash flow and balance sheets; these types of statements are primarily used for analysis by investors and government agencies but also internal managers. An important constraint to remember is that financial statements are limited by generally accepted accounting principles. Management accounting reports fall under no such constraints as they are often used to aid managers in an improved management decision-making process.

While there are behavioral implications in financial accounting such as concerns about how to measure and communicate economic phenomena such behavior considerations are secondary, although executive compensation based on reported results may have behavioral impacts.

Management accounting is primarily concerned with measurements and how reports will influence manager's daily behavior. Financial accounting is chiefly focused on the past and performs a historical evaluation of a firms performance, while managerial accounting focuses on forward moving analysis and forecasts such as implementation of budgets based on financial reports. Financial statements are very inflexible in that they will only report a given period at a time, in most cases one year or one quarter; managerial accounting varies and can jump from one year to 15 years depending on the need of the user.

Financial reports are generally presented in summary format and communicate a company's financial position as a whole while management reports tend...