Solutions to Assignments
MCO-05 Accounting for Managerial Decisions
Question 4
(a) What do you mean by accounting reports? What are the different types of reports for internal use?
An accounting report is a financial report that a business files to show its past and present financial situation. With this report, businesses and financial analysts can also predict their financial situation in the future more easily.
An accounting report might include information from every part of the business, or it might only focus on a small goal, such as determining which department uses the most cash flow. Many businesses that closely follow their finances report accounting at least once per month. They might even do it more often, particularly if they are pursuing company-wide goals related to finances.
An accounting report is typically made up of three types of reports:
- Income statement
- Cash flow statement
- Balance sheet
With these reports, a company can see its financial status over time as well as at one specific snapshot in time. All accounting reports should follow Generally Accepted Accounting Principles (GAAP) as established by the Financial Accounting Standards Board (FASB). These ensure accounting reports follow a set of principles, which include, but are not limited to, consistency, sincerity and good faith.
Consistency means a business is following the same accounting practices from month to month and year to year. Sincerity means the person creating the report (the accountant) is being honest. When people are acting in good faith, it means that everybody involved in every transaction is honest.
When all businesses follow the same principles, it's easier to compare one business to another. This ensures companies do not misrepresent their information so that investors and others outside the company are not misled regarding the company's financial standing.
Types of accounting reports
Accounting reports come in different forms depending on what information a company needs to know. Below are three common types of accounting reports:
Income statement
An income statement is a report that details overall expenses and revenue to determine a company's overall net profit. Sometimes an income statement is called a profit-and-loss report.
To prepare an income statement, accountants use data from ledgers and accounting journals. The statement includes both primary and secondary sources of income to get an accurate number. Similarly, primary and secondary expenses are included in the income statement.
Cash flow statement
A cash flow statement shows where cash is coming from (cash flow sources) and where cash is going (cash flow expenditures). This helps a business see how well they are generating cash. Executives and decision-makers can use this report to see where cash is coming from and then where it is going, which could include:
Business operations
Financing
Investments
A cash flow statement measures the cash flow between two dates. To prepare a cash flow statement, an accountant looks at the cash flow in every account, which may include equity accounts, liability accounts, expense accounts, revenue accounts and asset accounts.
Balance sheet
A balance sheet shows an ending balance at one specific point in time. It often includes balances for assets, liability and equity. The balance sheet gives the business an opportunity to evaluate its financial reserves as well as liquid assets. It also helps potential investors or lenders see the financial state of the company.
Typically, a business sets an accounting cycle, and someone prepares a balance sheet at the end of each cycle. Like an income statement, data for a balance sheet comes from the ledger.
