Financial Accounting Information

1. List the predictions that investors and potential investors want to make.

2. List the predictions that creditors and potential creditors want to make.

3. Distinguish financial accounting information from other types of data about a business organization.

4. Explain how financial accounting information is enhanced and clarified by verbal explanations.

Question: Investors are interested (sometimes almost obsessively interested) in the financial information that

is produced by a company based on the rules and principles of financial accounting. They want to use this

information to make wise investing decisions. What do investors actually hope to learn about a company from this

financial information?

Answer: The information reported by financial accounting is similar to a giant, complex portrait painted of the

organization. There are probably hundreds, if not thousands, of aspects that can be examined, analyzed, and

evaluated in assessing the financial health and future prospects of the model. Theories abound as to which pieces

of information are best to use when studying a business. One investor might prefer to focus on a particular portion

of the data almost exclusively (such as profitability) while another may believe that entirely different information

is most significant (such as the sources and uses of cash during the period).

Ultimately, in connection with the buying and selling of capital stock, all investors are trying to arrive at the same

two insights. They are attempting to use the provided data to estimate (1) the price of the corporation’s stock in the

future and (2) the amount of cash dividends that will be paid over time. Despite the complexity of the information,

these two goals are rather simplistic. If an investor owns capital shares of a company and feels that the current

accounting information signals either a rise in stock prices or strong dividend payments, holding the investment or

even buying more shares is probably warranted. Conversely, if careful analysis indicates a possible drop in stock

price or a reduction in dividend payments, sale of the stock is likely to be the appropriate action.

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