Managing Investing Buying and Selling Taxation

Resource Accounting information shows the For investors, accounting Accounting information provides Accounting records was use as a
Allocation performance of specific projects to information will indicate the assurances for buyers to safeguard reliable basis on which to create an
managers. performance of targeted firms as their purchases from supplier effective taxation system.
well as internal segment in when payment in advance is
Appropriate decision can be made firms. needed. It also helps buyers to The integrity and accuracy of the
by manager, discontinuing involve a long-term commitment system plays a vital part in
investment for project incurring Accounting information is to the supplier. securing the trust of the entities
lose and increasing investment for useful for investor’s starting that pay or collect the tax on the
profitable projects. point, helping to make decision For supplier, accounting government’s behalf.
for investment allocation. information helps to identify
-Road of accountant to show…. whether buyers can pay for the
In EMA, the accountant should purchases. Supplier may be
reporting the impact of EMA such High quality financial reporting making a long-term commitment
as pollution of the project that produced timely, increasing to the buyer, even to buy special
-Existing regulation need to the volume of investment into PPE to manufacture the goods.
enhance (selling of illegal activity the capital market. Providing
should be terminate) IAS 40 not such information to potential Financial statements or internal
listed investors reduces the risk of records including payment history
incurring a loss, which would to assess credit risk. Alternatively,
otherwise arise when trading credit rating agencies may be used
with more informed investors, a to assess the risk.
situation known as adverse
selection.
Pricing Managers could decide the amount Accounting information Where prices are negotiated, Governments rely on firms for
charges of products or services to provides picture of share prices buyers and sellers may use various types of taxation, and they
make profit according to costing for investor to buy or sell while accounting information about the therefore have a strong interest in
information. Costing information interest rate for lender to charge. other party to help decide how the accuracy and integrity both
focus the provision that past costs much they should charge or the entities’ accounting records and of
may be an unreliable guide to level they should pay. their financial reporting.
 future costs, in bidding for new Relationship between quality of
work.
Monitoring When managers look at the
Performance performance of particular projects
and activities, they are assessing on
whether the investment is a good
one and how it has been managed.
Managers are constantly using
accounting information to help
them decide whether and how
things could be managed better,
and action should be taken to
improve the performance of
individual lower-level managers
Likewise, these taxes take the
financial reporting, interest rates following forms:
and debts ratings. Companies • Firms collect taxes from third
with low quality financial parties on behalf of the
reporting incur higher interest government.
rates and lower debt ratings.
• Firms pay their own social
security contributions and taxes
based on their profits to
government.
Just as the top managers in a In some countries, tax codes
firm monitor lower-level frequently adjust reported profits
manager, so investors monitor for tax purposes; reported profit is
top managers. the starting point.
Accounting information helps If it is wrong, either through
investors decide whether action incompetence or through
should take to intervene in dishonesty, then, to the extent that
managers’ decisions, whether the problem is a widespread one,
they should be replaced and how the foundation of the system of
they should be reward. taxes on profits will be unsound.

Determine Employment contracts, including
Contractual those of top managers, sometimes
Performance include provisions relating pay to
accounting information.
Relevant accounting information is
usually about sales or profitability.
Top managers’ employment Payments between suppliers and Taxes paid and collected by firms
contracts sometimes include customers are determined by and other financial institutions is
provisions relating pay to accounting information. important for growth and
accounting information. development because these taxes
For example, suppliers may agree pay for all the essential
to pay a rebate to retailers if sales contributions that government
spending makes.
 Relevant accounting of their products reach a specified
information would usually level. Governments depend on firms and
concern profitability. other financial institutions, such as
Determination on whether a banks, for most of their income,
Although in law the contract in payment should be and, if so, how even if the taxes they pay are
such cases is between the firm much it should be, requires ultimately borne by third parties.
and the manager, the economic agreement between the two
relationship is between the parties’ accounting records. Governments can also borrow, but
investors as principals and the the ability to do so depends on the
manager as their agent. expectation of future interest
payments and ultimate repayment,
both from future taxation.

Enables prudential regulation,

price regulation, competition
investigations, national income
statistics, financial honesty in
society, and effective management
of government departments. This
helps to form good government.
Routine Accounting information is Any party that transacts with a Credit purchases and sales have to Some historians, Jacob Soll for
Operations important for employees, ensuring firm may well rely on the accurately record to ensure proper example, even argue that good
correct payments to suppliers and accuracy and efficiency of that and efficient payments and accounting by governments is
collections from customers while firm’s accounting records and collections subsequently. associated with the rise of nations
maintain desired stock levels, and processes. and poor accounting with their
so on. Buying and selling on credit decline.
Equity investors rely on investee become more difficult where
Management is not usually a direct firms to maintain accurate either party’s accounting systems This is partly for reasons of
user of this information except records of, for example, who are inadequate. governance; good accounting
when queries arise and need to be their shareholders are, how facilitates accountability for
many shares they hold, governments as well as for firms.
 investigated and of the firm’s entitlements to dividends, and
internal reporting.
Management relies on such basic
record keeping for the proper and
effective running of the business,
and managers have a responsibility
to ensure that the accounting
systems are fit for purpose.
Statutory
Protection
dividend payments. Lenders
have corresponding needs.
In some jurisdictions, statutory
capital maintenance requires
that limit distributions to
shareholders and which were
based on accounting
information.
These may support by statutory
requirements on how profits are
to be calculated which are also
intend to provide protection to
lenders (and others).
Statutory capital maintenance There are specific lessons in this
requirements, where they exist, respect for countries wishing to
provide protection to suppliers attract foreign direct investment.
who provide credit and to Some research suggests that the
customers who pay in advance as quality of infrastructure – and
well as to lenders. therefore the ability of potential
investors to operate effectively in
As noted earlier, such the target country – is of greater
requirements may supported by importance to investors than low
further requirements on how tax rates.
profits are to be calculated.