The Importance of Financial Accounting and Nonfinancial

Financial Accounting The major objective of the financial accounting information system is to provide relevant information to individuals and groups outside an organization's boundaries, for example, investors, federal and state tax agencies, and creditors. Accountants achieve these informational objectives by preparing financial statements such as income statements, balance sheets, statements of stockholders' equity, and cash flow statements. Of course, managers within a company might also use these financial reports for planning, decision-making, and control activities. However, for most decisions within the firm, managers likely use managerial accounting reports. Recall from your introductory financial accounting course that an organization's financial accounting cycle begins with analyzing and journalizing transactions (e.g., this data is captured when a business event occurs that has a monetary impact on the financial statements) and ends with its periodic financial statements. Accounting clerks, store cashiers, or even the customers themselves input relevant data into the system that stores these data for later use. In financial AlSs, the processing function also includes posting these entries to general and subsidiary ledger accounts, preparing a trial balance from the general ledger account balances, and preparing financial statements. Nonfinancial Data. The basic inputs to, and outputs from, traditional financial accounting systems are usually expressed in monetary units. This can be a problem if the AIS ignores nonmonetary information that is also important to users. For example, an investor might like to know what the prospects are for the future sales of a company, but many financial AISs do not record information such as unfulfilled customer sales because such sales are not recognizable financial events for accounting purposes, even though they represent important business events. The AIS is a subset of the management information system of an organization, which also stores important nonfinancial information about organizational resources, business events, and agents (customers, vendors, banks, etc.) in databases precisely because they are relevant to the decision-making processes of their users. Inadequacyes in financial performance measures have encouraged companies to consider nonfinancial measures when evaluating performance. Some of the advantages include the following: (1) nonfinancial measures can provide a closer link to long-term organizational strategies; (2) drivers of success in many industries are "intangible assets" such as intellectual capital and customer loyalty, rather than the "hard assets" that are recorded on balance sheets; (3) such measures can be better indicators of future financial performance; and (4) investments in customer satisfaction can improve subsequent economic performance by increasing revenues and loyalty of existing customers, attracting new customers, and reducing transaction costs._ Several professional associations now formally recognize that nonfinancial performance measures enhance the value of purely financial information. For example, in 1994 a special committee of the AICPA recommended several ways that businesses could improve the information they were providing to external parties by including management analysis data, forward-looking information such as opportunities and risks, information about management and shareholders, and background information about the reporting entity. Similarly, in 2002, the American Accounting Association (AAA) Financial Accounting Standards Committee recommended that the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) encourage companies to voluntarily disclose more nonfinancial performance measures.