What decisions do management make that is dependent on the balance sheet? the income statement? the statement of cash flows? the retained earnings statement?
Accountants want to honestly believe that management uses these reports to make decision, in fact, I have never known a single top manager to use these documents for an investment or operational decision. These statements are used to reflect what is going on, not to determine what is going on.
Your accounting instructor may have a differing view, so be cautious.
Management makes various decisions based on the information presented in financial statements. Here are some examples:
1. Balance Sheet:
- Capital Expenditure Decisions: The balance sheet provides information on the company's assets, liabilities, and equity. Management can evaluate the available funds and make decisions regarding investments in long-term assets, such as equipment, buildings, or technology.
- Working Capital Management: By analyzing the current assets and liabilities on the balance sheet, management can assess the company's liquidity position and make decisions regarding short-term financing, inventory management, and accounts receivable/payable management.
2. Income Statement:
- Pricing Decisions: The income statement reflects the company's revenues, expenses, and profitability. Management can analyze the impact of different pricing strategies on gross profit margins and net income to make pricing decisions.
- Cost Control Decisions: By examining the expense categories on the income statement, management can identify areas where costs are high and take actions to reduce expenses and improve profitability.
3. Statement of Cash Flows:
- Investment and Financing Decisions: The statement of cash flows presents the company's cash inflows and outflows from operating, investing, and financing activities. Management can evaluate the cash flow patterns to decide on investment opportunities, debt repayment, equity financing, or dividend payouts.
- Cash Flow Forecasting: By analyzing the cash flow trends, management can project future cash requirements and make decisions regarding capital budgeting, working capital management, and cash reserves.
4. Retained Earnings Statement:
- Dividend Decisions: The retained earnings statement shows the changes in retained earnings over a specific period. Management can assess the company's profitability, cash flow position, and growth opportunities to determine if it is appropriate to distribute dividends or retain earnings for reinvestment.
In summary, the balance sheet, income statement, statement of cash flows, and retained earnings statement provide valuable information for management to make decisions related to capital expenditures, working capital management, pricing, cost control, financing, dividend payouts, and overall financial strategy.