An Analysis of Financial Statements and Management Accountancy

1. Roles and objectives of financial statements

Financial statement analysis appeared in the early 20th century (Foster, 1986). At the beginning, financial statements were only adopted to record daily cash flow primarily for banking services. Later, financial statements gradually provided some decision information for enterprise management by directly reflecting their benefits of operation. Until now, it has changed into a part of enterprise management, indicating the making of great enterprise decisions and meeting the needs of enterprise management.

Enterprises’ financial statements are made by the accounting personnel, who assemble the financial situation of enterprises as well as the interests of the owners according to the operation of the business (Alexander, 1990). It will be finally reflected in the operation benefit of enterprises. At the same time, based on the accounting treatment methods and procedures, the accounting personnel will analyze the effect of business activities of enterprises and eventually reflect the results to the decision makers.

2. Limitations existing in the published financial statements for companies

2.1 Problems in the compilation of financial statements

There are some shortcomings in the compilation of financial statements. On the one hand, the information revealed by the enterprise financial statements is not comprehensive, which ignores the roles of non-financial information and off-balance-sheet information; On the other hand, the effectiveness of the enterprise financial statements is not guaranteed. At present, the information disclosure of enterprise financial statements is lagging, lack of prediction and assessment of economic activities, which leads to the result that many enterprises miss opportunities in the long-term development. Enterprises’ financial statements just reflect the management situation in a short period of time without focusing on the future, and this is precisely what investors care about most.

2.2 Lack of effective management and supervision system

Many enterprises have no perfect financial management and supervision system. On the one hand, the enterprises do not establish administrative supervision system, and there is no supervise and control on accounting personnel. Without constraints from the enterprises, their analysis of the revelation information for financial statements is not comprehensive, resulting in the inaccurate understanding of the business situation of enterprises, which poses a threat to the companies’ long-term development; On the other hand, some accounting personnel are not dedicated to the analysis of the financial statements and can not guarantee their quality. In addition, in the analysis of financial statements information, plenty of managers do not play the role of audit supervision, thus some accounting clerks forge the data in financial statements, which reduces their authenticity and accuracy and accordingly harms the interests of the enterprises.

2.3 Overdue disclosure of information

The disclosure of enterprises’ financial statements should be featured with timeliness. Only timely disclosure of information can enable companies’ investors to make effective and accurate actions. However, in most businesses, they ignore the financial information and aim to obtain extravagant profits, which is mainly showed in the following: failing to disclose the major financing information, the major issue information in the contract signing with business partners, the important information for the corporate liabilities and asset distribution, etc. (Francis &Schipper, 1999). For an enterprise, the more timely information disclosure in the financial statements is made, the greater the role of the statements play, on the contrary, if it takes too much time to disclose information, the statements will be of little value for the enterprises.

2.4 Problems existing in the individual ability of enterprises’ financial and accounting personnel

Financial accounting personnel are in charge of the analysis of the financial statements for enterprises. The authenticity of the information disclosure is determined by the executive force of accounting personnel. Therefore, the accounting personnel's professional abilities and skills as well as business level and moral quality can determine the quality of corporate financial statements. At present, various abilities of enterprises’ financial and accounting personnel are far from a professional level. Accounting personnel’s ethical problems, such as the phenomenon of revealing the financial statements’ information, occur occasionally. Problems existing in the individual ability of enterprises’ financial and accounting personnel are basically embodied in the following several aspects: weak autonomous learning consciousness; inadequate ethics quality; insufficient professional quality; few training courses and chances provided by the companies.

3. Regulations to solve the limitations

Firstly, the management should perfect the compilation foundation of financial statements. The compilation of enterprise financial statements should predict the future instead of only revealing some historical information. The serviceability should be put in the primary place when compiling financial statements. Try to perfect the compilation foundation of financial statements by making full use of scientific and systematic analysis methods. Secondly, companies should establish audit supervision departments. The establishment of audit supervision departments will enhance the quality of information disclosureof financial statements (Dogas, 2011). Audit supervision departments can check the internal audit personnel's qualification and set up standards and regulations.  Lastly, enterprises must strengthen the arrangement of training to improve the professional quality of accountants. Enterprise training should include the background information of the enterprise management, the enterprise’s financial system composition, the enterprise's audit supervision system and the strengthening of professional accounting knowledge and skills.

4. Challenges faced by business when making decisions

Firstly, most of the small and medium-sized enterprises are lack of correct management decision-making mechanism (Solem, 1992). In the business, due to the insufficiency of management talents, when making decisions, businesses don't do market research and strategic planning or write feasibility report. The sales target designed is just made according to their own expectations of corporate profits. With such a decision-making mechanism, the best product also cannot quickly occupy the market. Lack of scientific evidence and real market information, managers can only make decisions with their own subjective intentions, which is obviously undesirable.

Secondly, some enterprises are weak in function management and basic management, and many decisions need to be handled by operators themselves. The problem of survival is also pressed on the operators, so that they have no enough time for decision making. For operators, they not only need to take time to make correct decisions, at the same time, they must cultivate their decision-making ability. When dealing with daily work and making important decisions, they shouldtakethe long-term development of enterprises into consideration, which also helps the formation of the right decisions.

5. The effectiveness of management accountancy

Management accountancy refers to the economic management activities which regard the enterprises’ capital movement now and in the future as the research object, in order to improve the economic efficiency and provide the scientific basis of management decisions for the enterprises’ internal managing personnel (Johnson &Kaplan, 2007). In the process of daily operation, its capital management involves not only the daily operation of the enterprise, but also the further development and the market competition, thus it occupies a core position in the enterprise's overall management. In addition, in the process of daily capital management, management accounting can also timely find problems in the management of enterprises’ funds and take immediate measures. The following part will focus on the role of one specific technique of management accountancy, namely, planning and control accounting.

The control technique of the management accountancy is an important guarantee to the implementation of enterprise budget and the realization of decision goals (Youssef, 2013). It is an effective means to improve the economic efficiency of enterprises. By tracking the implementation of the budget of the enterprise, the management accounting is able to complete the collection of various data in the business activities and compare the differences between the budget data and actual data as well as making reasonable analysis and investigation of existing problems in a timely manner. The control technique of management accountancy can make reasonable control of the differences in the process of budget implementation, and timely take measures to adjust and improve, to ensure the realization of the targets. It is also capable of making up for the deficiency of the budget reflected by the feedback information, in order to guarantee the feasibility of the plan and budget. Take the company of Haier as example. Haier, known as China's leading innovator in management innovation, has become a leader in China's household appliance industry.  In Haier group, each kind of economic business should undertake a strict authorization procedure and corresponding inspection system to ensure the quality of the handled economic business after the authorization (Lin, 2005).

6. Conclusion

In the first part, this paper makes a study on the financial statements for companies by stating their roles, objectives and limitations. The paper also proposes ways for the regulations of these limitations. In the second part, the thesis focuses on the research of the effectiveness of management accountancy by listing several challenges faced by companies to make decisions as well as analyzing a specific technique of management accountancy with practical example. The research has its insufficiency, which needs to be improved by the further study.

References:

Foster, G.(1986). Financial Statement Analysis. Econometrica, 40(1) :105-134.

Alexander, D.(1990). The objectives of financial statements and their usefulness to the general user groups. New York: Springer US, PP.64-74.

Lin, W.T.(2005).Effective OEC management control at China Haier Group. Strategic Finance, 86(11): 39.

Johnson , H.T. &Kaplan, R.S.(2007).The Rise and Fall of Management Accounting. IEEE Engineering Management Review, 15(3) :36-44.

Dogas, C.(2011). Effective Audit Supervision. Internal Auditor, 68(5): 55.

Francis, J. &Schipper, K. (1999). Have Financial Statements Lost Their Relevance?Journal of Accounting Research, 37(2) :319-352.

Youssef, M.A.(2013). Management Control System Style and Management Accounting Techniques Adoption. Journal of Accounting & Marketing, 2013(2): 56.

Solem, A.R.(1992). Some Applications of Problem-Solving versus Decision-Making to Management. Journal of Business & Psychology, 6(3) :401-411.