Financial Accounting and External Stakeholders

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Accounting is a way to communicate financial information about a business to those who wish to use the information to make decisions. Two types of accounting are management accounting and financial accounting. Management accounting is used by managers to run a business. Financial accounting provides information to various external users. (Horngren, 2012) Financial statements and their related disclosure notes provide information such as the results of operations, the financial position of the business, and cash flows. The most frequently provided financial statements for external users are the balance sheet or statement of financial position, the income statement or statement of operations, the statement of cash flows, and the statement of shareholders' equity. This paper will discuss financial accounting and how external stakeholders use financial information to make decisions. The balance sheet and the accompanying disclosures provide a lot of information to external users. The purpose of the balance sheet is to report a company's financial position on a particular day at the end of a period. The balance sheet presents assets, liabilities, and shareholders' equity in an organized way. “An important limitation of the balance sheet is that it does not portray the market value of the entity as a going concern, nor its liquidation value (Spiceland, 2011).” For example, assets such as land and buildings are listed at their historical costs instead of their fair values. Some company resources, such as trained employees, management, and reputation, are not listed as assets. Also, many items listed on the balance sheet rely on estimates rather than determinable amounts. For example, companies estimate the amount of accounts receivable that will be collected. Because of these reasons, as well as others, a company's book value, or its assets minus its

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