Question

Explain why financial statements prepared for external reporting purposes should not be used for management performance evaluation.

Answer 1

Answer: Financial Statement

Financial reporting is compliance oriented and is used for external purposes. It encompasses the standard timely reports that companies prepares on timely basis which include:

1. Profit and Loss Statement

2. Balance Sheet

3. Statement of Cash Flows

These reports are mandatory for all businesses. Banks, investors and regulators use these reports to approve loans, lines of credits and to make sure you are following GAAP (Generally Accepted Accounting Principles).

These reports reflect the financial standing of your business at a specific point in time. They show the overall picture of how your company is performing but don’t give you real insight into the specifics of your operations.

Managements Report

You will be able to dive deeper into the financial standing of your company through management reports which consist of

1. Profit and Loss by Class  

       Department

       Team

       Job

2. Realization Rate   

3. Utilization Rate

Unlike financial reports, management accounting is not mandatory and is for internal use only. Your company doesn’t have to follow GAAP guidelines when producing the reports.

Instead of an overall evaluation of the company, management reporting is focused on segments of the business. By segmenting, you can get into the details and analyze the drivers of your business.

Management reports are great for CEOs to gain insight on specific areas of their business. However, you want to make sure you are getting the reports that your business needs to drive strategic decision making. You don’t want to put the work into pulling reports that aren’t being acted upon.