Essay on Accounting for Managers

2815 Words Nov 25th, 2011 12 Pages
Running Head: FINANCIAL STRUCTURE AND STATEMENTS

Importance of Financial Structure and Statements

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Importance of Financial Structure and Statements

Introduction

This essay discusses the role of financial structures on the profitability and stability of companies and the role of financial statements prepared using historical cost convention and accruals concept in the decision making process. Both aspects of companies discussed here are of much importance as they directly affect companies, their financial condition and the representation of facts to the relevant users. The financial structure of a company reflects various sources the company has used to finance its
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The existence and stability of companies depends on profitability as it would be illogical to operate a company for an extended period without making any profit. The profitability of a company is dependent on the financial structure as a company would not be able to operate without finances and it would have nothing to offer or sell to its customers.

Profitability and Value Creation

The objective of company management is the creation of value for shareholders. This value can be created through various methods but the most important component of value is the actual ability of the company to generate profits. The effect and role of financial structures on the profitability of the firm is quite significant. Successful companies continuously strive to increase the profitability of the company as higher profitability means higher value for the firm and eventually the shareholders. The profitability is dependent on many factors including financial structure, sales volume and cost structure. The compensation of managers in many companies is linked with their ability to surpass budgeted sales and profits levels. The value of a firm for shareholders is measured through various tools including Economic Value Added and Market Value Added and Return on Invested Capital.

Importance of Financial Structure

Financial structure of a company is important for the management and shareholders as it defines the various modes of financing the company uses to support its

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