Why the hell an R&D manager or a lawyer needs to learn Financial Accounting at Business School? The secret answer; because they need to pass the exams and get a degree that they paid so much money for. Prof. Anna Turner (http://business.ceu.hu/profiles/faculty/anna_turner) may give a different justification though.
Engineering has taught me right and wrong answers, a “reasonably” correct answer, can only be defined in accounting. The introductory Accounting class was quite interesting. Over the years, I’ve seen many earning reports and financial statements from various companies, but I’ll surely look at them with a different perspective now. I mean, there are so many different kind of financial statements, each giving only part of the information about a company’s financial health. In the end, it all adds up to give a lot of insight into how a company is performing. Unfortunately it’s not only 0 or 1, but lot of undefined states in between that one needs to pay attention to.
Financial Accounting course at Business Schools will tell you how to interpret the numbers and how much to believe in them. For instance (at least for companies following US-GAAP):
– Each company’s financial statement may look slightly different based on what they choose to declare and to whom.
– Companies mostly try to show a rosier picture than it actually is.
– Items that may look the results look bad, are mostly omitted; reducing the visibility of people using these reports.
– Each company decides when they recognize revenue and how much. This can change the real picture a lot.
– Auditing companies only provide a reasonable assurance of the correctness of data.
Basically the executives using financial reports need to be aware of usual accounting practices in the region they are looking at. They need to be able to see the hidden messages.
For example, can you imagine how two online shoe sellers’ financial statement will compare if one recognizes revenue on order shipment and the other after 30 day trial period? Can be drastically different. Shoes are a very personal item and customers tend to return them frequently. Revenues may look much higher if reported after order shipment and much lower in the other case.
Slightly off topic, but if one intends to make an investment decision or to work with the company in some way, financial reports will only provide a part of the big picture. It has to go with detailed market research on the company, its history, recent activities, mergers and acquisitions, future plans, investments etc etc. Only then can one form a “reasonable” opinion about the actual health and prospects of the company.
There is a reason why Financial Accounting is a core subject in good Business Schools. It’s as much relevant for a Lawyer, as it is for a senior executive in Finance firm or even an Entrepreneur.