The Importance of Insurance

According to the document (McGraw-Hill), financial accounting may refer to "the process of designing and operating an information system for collecting, measuring and recording an enterprise's transactions, and summarizing and communicating the results of these transactions to users to facilitate making financial and/or economic decisions." Since the product of financial accounting would affect the decision making for users, it should maintain relevant, reliable and consistent. There are several types of financial reporting users which could be divided into two groups- internal and external users. In which, the users from those groups have different purposes of usage. The following essay is going to discuss the major objectives and roles of financial accounting.

The information of financial accounting helps investors, creditors and other users in making decision so the reports should be containing four primary characteristics: reliability, consistency, relevance and comparability. There are some standards in financial accounting to maintain the quality of financial report, International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), for example. These standards ensure that all firms are competing under a fair condition and that the information present by them is consistent, relevant, reliable and comparable.

The relevance and faithful representation are the main decision-specific qualitative characteristics that make information useful. Relevance means the accounting information that provides predictive value and/or confirmatory value. In order to be a faithful representation of business transaction, the information should be neutral, complete, and free from material error. Regardless how representative is the information, the information is useless if it is not relevant to the decision at hand. Conversely, relevant information is of slight value if it does not accurately present the business activity. Hence, the enterprise should weigh the trade-offs between faithful representation and relevance in a financial accounting report.

In financial accounting, there are a number of key documents which comprise of patterning the method of business traded during a certain time, in which income statement and statement of financial position indicate the cash flows from asset, liability and equity in a certain period. As mentioned in introduction, the users of financial account information are separated into two groups. While the board of directors, managers and employees are internal users, external users contain equity investors, loan creditors, employees, analysts, suppliers, governmental agencies, customers and community. Interestingly, employees are considered as both internal and external users. They are internal users who are decision makers for the firm by using the financial reports. For example, setting the selling price of a company's product that will achieve profit maximization for the company. Yet, employees are also external users due to the fact that they use financial information when making their personal decision, such as deciding whether they should ask for an increase in salary and whether to stay with the company or quit and look for new jobs.

Measuring a firm's economic activities and communicating those measurements to external parties are the two main functions of financial accounting; wherein, equity investors and loan creditors are the two primary external users of financial accounting information. Equity investors are those existing and potential stockholders while loan creditors include the existing and potential holders of loan stock and debentures, and lenders of both short-term unsecured and secured loans. The financial accounting information assists investors to efficiently allocate their economic resources