Financial and Management Accounting - Essay Example

RUNNING HEAD: Financial and management accounting A critique on the ment: “There are limitations, but financial and management accounting perform fundamental role in the measurement in measurement of performance within an organization.” Name of Student Name of Subject Name of Professor Date This paper seeks to critically evaluate the statement: “There are limitations, but financial and management accounting perform fundamental role in the measurement in measurement of performance within an organization.” The limitations of financial and management accounting need to be accepted by users in an imperfect world. If something could be perfected in the business world and there no limitations, the most scientific will win any game including the running corporations as the latter struggle for survival and competition in the light of what may happen in the economy. None has accomplished perfection so far because of limitations. One limitation of financial accounting in measuring performance is on the assumptions. The going concern concept in accounting assumes that the business would continue its business in the coming years. Thus, when corporate stocks are valued a projection into the future is necessarily based on the assumption. Since, a company is normally expected to grow as the economy allows, every investor generally would like to look at the future with positive anticipation. External auditors are supposed to make accounting information reliable by empowering them to issue “going concern” opinion on companies. They are however found to be reluctant in so doing at they may become self-fulfilling prophesies (Davis, 2009). However, the financial crisis that started in 2007 should be considered as not fully anticipated by everybody. Had the government anticipated the same, they would have prepared for most likely - the economist and politicians could have done something. Who would want to have unemployment? Who would want to have losses in the stock market? Who would want to have peace and order problems caused by economic problems? The Lehman Brothers debacle in the United States was a case in point. By having a continued rise in company’s income and assets before the crisis, many believed that the company would continue to grow. That was one of the reasons why investors poured their money to the company and other companies in the industry. Surprisingly, in less than one month the value of the stocks of Lehman Brothers went down suddenly without warning. Many lost their investments value from Lehman Brothers. This event was followed by subsequent events like government bailing out of the troubled firms in the economy. The blame game phenomena came about where even the accounting standard setting was being made responsible for the economic failure. One particular issue is the fair value accounting. The standard on the fair value accounting partly arose from the criticism on the historical accounting, which was alleged to have become irrelevant for being backward looking while the market is forward looking. Therefore, the accounting standard setters may have shifted from information reliability shifted in favour of information relevance, when fair value accounting was allowed as part of the accounting standard in order to help decision makers. Eventually however, the usefulness of fair value accounting was therefore put in question and this necessitated the examination of the adequacy of the provisions or reserves in relations to risks are required by the accounting standards used in fair value accounting (Hughes and Agatha, 2008). However, as it turned out, some decision-makers were correct but others were also wrong or utterly wrong. Some users may have known what the deeper reality was but they were simply blinded in their lack of objectivity, as they would rather want to hear positive things than to be worried about the possible downturn in the economy. They knew the limitations of accounting, but their behaviours were affected by more controlling factors. Has financial and management accounting failed in their role to provide information? Those who reacted dispassionately knew the limitations, and these may be those who avoided or minimized financial losses because of the crisis. Those who were blinded by their greed failed to see or may have refused to see the accounting limitations. The reality therefore of financial and management accounting performing fundamental role in the measurement in measurement of performance within an organization cannot be denied even with their limitations. Organization whether profit or non-profit need to have some objectives that are closely related with their need to have funds to keep them running. Since no organization could exist without using financial resources, there must be a way of knowing how well these funds are being used. It is in this context that financial and accounting information assumes their indispensable role. To manage is to measure and financial and management accounting provides the information to measure resources management for decision-making. Accounting information is provides a barometer in the same way that a blood pressure meter is made useful for deciding for good health. The fundamental role therefore is in the provision of that information as a way to measure and manage resources in an organization for the accomplishment of business objectives that must also be measurable. In the context of a profit organization, profits are measured by deducting revenues from expenses. Thus, there is need to have the income statement together with balance sheet and cash flow statements in order to monitor the level or status of accomplishment of objective. If it cannot be determined how far the business organization is measuring up to its objectives then there is no way to determine whether it could be considered successful. The consequence of course must be that failure to meet objectives should mean not accomplishing the purpose of an organization’s existence. In the case of non-profit organization, although they do not have financial objectives, financial resources are indispensable as well. These organizations need to be efficient and effective in the use of financial resources as a way of justifying the social benefit that they claim. If the value of the benefits given will not be commensurate with the use of resources, the chances that non-profit organization will declare attainment their objectives become almost nil. Most likely, they will not be supported by other entities, including the government , for the causes of this type of organizations since donors or benefactors also realize the opportunity cost of resources that they give. The social benefit should be obvious to justify private costs (Stoeckl, 2004), which are undeniably measured by financial and management accounting. The role then is just so fundamental role that the absence of them would result to having no organization at all. To conclude, the limitations could be considered as something that must be accepted by users because the advantages will far outweigh the disadvantages. If pills need to be bitter in order to be effective in curing ills, the limitations or disadvantages of financial and management accounting should not be surprising as well if the corresponding advantages in terms of better decisions in the management of resources and in the accomplishment of many desirable organization objectives would indeed far outweigh these limitations. The pain becomes a necessary part of the gain. References Davis, Robert R (2009). Financial Ratios Influencing the Issuance Of Auditors Going Concern Opinions. Proceedings of the Northeast Business & Economics Association, p65-68 Hughes and Agatha (2008); Journal of the Academy of Business & Economics, Vol. 8 Issue 2, p56-65 Stoeckl, Natalie (2004). Business Strategy & the Environment (John Wiley & Sons, Inc), Vol. 13 Issue 3, p135-155 Read More