Analysing What Henry Ford Once Remarked Accounting Essay

Category: Accounting

According to Paul G. Hastings ,"finance" is the management of monetary affairs of the company. It includes determining what has to be paid for raising the money on the best term available, and devoting available funds to the best use.

Ken Midgley and Ronald Burns state that "Financing is the process of organising flow of funds so that a business firm can carry out its objective in the most efficient manner and meets its obligation as they fall due".

"In an overall sense finance embraces many areas other than corporation finance, money, banking and credit of various types and classes. Considered as a whole, finance may be said to be the circulatory system of the economic body, making possible the needed co operation between many units of activities".

Inevitably business is finance oriented. It is the process of using money to make money. Finance functions can no work effectively unless it draws on the disciplines which are closely associated with it. Management is the process of converting information into action; and accounting is the source of most of information that is used for this purpose.

While accounting is the data collection process dealing with accurate reporting, finance is a managerial or decision making process. Arising out of close relationship of finance with accounting a new branch of accounting has emerged under the title "financial accounting"

Financial accounting -The kind of accounting which provides information to decision maker outside the firm is called financial accounting. Financial accounting is concerned with the preparation of reports which provides information to users outside of the firm. The most common one is the financial investment included in the annual report. The dominance of the balance sheet in financial accounting underscores the financial aspect of this function.

Management accounting- Management accounting is presentation of financial data as part of the management task of management decision and control. Management accounting reduces the bulk of business information originating in the company to a digestible form. It is the kind of accounting that provides all essential information to the management which assist them in creation of policy and in day to day operation of an undertaking.

A variety of simple techniques have been used such as break even charts, variance curves or tables, indicating the deviation from expected and budgeted performance, the charting of performance ratio among others- to serve as early indicators of changes that may require action.

Financial Management is responsible for planning, control, decision making and managing risk for a organisation

Planning:

Planning is done at 3 level, Strategic, operational and tactical. Strategic planning is long term planning however operational is medium term and tactical is short term.

Strategic planning involves high level of risk as it is long term planning and hence covers high level of uncertainty simply because it is difficult to predict future. Therefore it is very important that accurate, timely and reliable information are available based on which decision can be made.

This brings in scope for a system where such information is available- Accounting.

Management is highly dependent on accounting for operating facts. Hence it can also be described as "the measurement and communication of financial and economical data" .Therefore we can say that "Accounting is the science of book keeping and establishes the principles and concepts which should govern the collection and presentation of financial data". It is a discipline which provides information essential for efficient conduct and evaluation of the activities of any organisation.

Decision making

Financial decisions have been considered as the means to achieve long term objectives of the corporate. At broad level financial decisions can be classified into four categories:

Financial requirement decisions.

Investment decision

Financing Decision

Dividend decision.

There are three key stages of decision making process:

Define objectives

Evaluate choices along with alternatives. identify and implement

Review, feedback and assess risk.

Following are the key objective of a financial management function:

Maximizing profit

Maximizing wealth

Minimising risk

Long run value

Once decisions are made and policies are implemented then the next question comes- How to measure and analyse performance of decision, in light of objectives.

How do we know that where we are? How we are doing? Whether we are going into right direction or have we achieved our objective? If a decision cannot be measured then they will be difficult to manage.

It requires financial metrics to analyse and measure performance of all financial decisions. Here again accounting acts as information system where outcomes can be measured financially.

Control:

Actual outcome need to be measured and compared periodically with those planned and budgeted for, for each responsibility centre of an organisation which are under designated management control. Management need to react appropriately and in timely manner ,on such variance in performance, so that organisational objectives are met. It is the accounting information system where such performance reports are possible.

Managing risk:

Although " No risk, no gain" is a common adage, in the world of business uncertainties, financial management has to calculate financial risk, business risk or any other risk that may work to the disadvantage of the firm before embarking on any course of action. In order to calculate such risk factor current and historical financial performance information of the firm need to be analysed in light of present and predicted economic climate. Accounting information system facilitate required information for this purpose.

There is wide variety of extensive financial information compressed in different published sources ,so much so that one is totally confused, not knowing what to choose ,unless one is able to get the exact source of information and knows what one is looking for.

Therefore fundamental role of Accounting is concerned with deciding which data is needed and which is to be recorded, determining how the data are to be processed, deciding how the reports are to be designed, and determining how the information is to be communicated to the relevant users.

There are certain characteristics which influences the usefulness of an information system.

Understandability

Relevance

Consistency

Comparability

Reliability

Objectivity

Accesiblility

Timely

The accounting information is vital to the firms activity, for it is used to make decisions with in the organisations (by the management) and outside the organisation (by investor and creditors). Its real value will depend upon its end use purpose. Financial information is required by:

Investors

Directors and Managers

Creditors

Share Holders

Employees

Debenture Holders

Public Depositors

Government

Private Sector Organisation

Academicians, Researchers

Industrial Houses

Professional bodies.

Financial Institutions

Member of the public including consumers.

Over the time accounting has evolved as an information system rather than just a place to record financial transaction.

To obtain information we need data and