Decision Making for External and Internal Stakeholders

Accounting
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Institution / Affiliation
Question one (a)
Financial statements help external and internal stakeholders make informed decisions such as investment as well as evaluate business performance and value. Usually, informed investment decisions rest on the analysis of accounting data recorded a company’s financial statements. Therefore, investors should analyze financial statements such as balance sheet, stakeholder’s equity, statement of cash flows, notes to financial statements, and income statement –to determine the actual financial position and performance as well as the value of a company (Blessing & Onoja, 2015). For example, the value of the price of shares and dividends depend on the success of the company at a future date.
Alternatively, an investor can use investment analysis methods such as the bottom-up approach, technical analysis, top-bottom method, fundamental analysis like earnings per share, return on equity, book value, and price-earnings ratio (Blessing & Onoja, 2015). However, relying on a single financial statement can be disastrous because it might not certainly show the true value and performance of an organization.
Question one (b)
In the same way, non-financial data plays an essential role in investment decisions. Non-financial disclosure such as social, environment, and governance behavior offers insightful information about the future of a business. According to Du Plessis (2016), an investor should, therefore, analyze whether the company has a clear strategy that creates value in the short, middle and long-term; organization’s history of governance; and the risk of the poor environment – before deciding to invest in any business.
Question two
Despite the substantial benefits of financial statements in investment decisions, they are deprived of accuracy and relevance from time to time. In the contemporary competitive business environment, businesses easily manipulate financial statements to influence investors and other external stakeholders towards a specific course. For instance, in 2001, WorldCom – an American telecommunication corporation falsely overstated its profits with almost $4 billion through its profit and loss statement (Fox, Gilson & Palia, 2019). Consequently, this financial statement misled many shareholders into investing with a view that the organization was making profits whereas it was making huge losses.
The major disadvantages of financial statements include; overreliance on historical costs, inflationary effects, financial statement manipulation, prone to frauds, not comparable across different companies, and difficulties to verify due to unaudited statements (Li, 2020). Also, financial statements naturally disregard non-financial information, they are not self-explanatory, based on definite period, contain errors and omissions, and lack specific predictive value (Li, 2020). For example, if an organization purchases an asset at the beginning of a financial year, the balance sheet value of the asset at the end of the year after depreciation may be different from its actual market value. In this scenario, relying on the profit analysis may be disastrous as the profits may be altered or manipulated thus m...