Financial Accounting and Its Role in Corporate Environment

Financial Accounting
Author’s Name
Institutional Affiliation
Course Code and Name
Professor’s Name
Date
Financial Accounting
Financial accounting refers to the process of summarizing, reporting, and recording various transactions from business operations within a specific period. In particular, the transactions are summarized in a way to prepare different financial statements, such as the cash flow statement, balance sheet, and income statement among others. Generating financial statements is crucial since it portrays how a specific company is performing financially such that individuals outside the firm, such as creditors, customers, investors, and suppliers can understand the financial position of the company. The paper discusses the role of financial accounting in a corporate environment.
The main objective of financial accounting in a corporate environment is to provide appropriate information about a specific company that is crucial to existing and potential stakeholders, including lenders, creditors, and investors so that they can make proper decisions when it comes to offering resources to the company (Financial Accounting Standards Board, 2021). Some decisions that can be made from the information made available through financial accounting are selling, holding, and buying debt instruments and equity and settling loans among others. In most cases, decisions about holding equity, selling, or buying usually depend on the company’s returns since investors expect a specific percentage of money from their investments. In addition, the decision from potential lenders and creditors about settling or offering loans are based on the interest payments and principal. In a corporate environment, financial accounting keeps investors, creditors, and other stakeholders informed since they can assess a firm’s financial performance regularly to ensure that they do not lose their investments. Besides, such stakeholders do not invest in companies that are in poor financial positions since they are likely not to return their investments. Another vital role of financial accounting is to help creditors, lenders, and investors to assess a firm’s prospects for net cash inflows so that they can understand how the company manages its resources and how effectively the governing board and the management discharge their responsibilities (Financial Accounting Standards Board, 2021). For example, resources should be protected from unfavorable economic impacts, such as technological changes and prices to comply with applicable regulations, contractual provisions, and laws.
Financial accounting does not only provide relevant information to external stakeholders, but it as well informs individuals within the company so that they can assess an entity’s financial performance. For example, the management and the board of directors want to know whether the firm is operating effectively. On that note, financial accounting tells them how the company is performing such that these internal stakeholders can make proper decisions to facili...