Final answer:
The information in financial accounting must follow GAAP, whereas managerial accounting does not follow GAAP and is used for internal purposes. As firms establish themselves, investors rely more on published financial data rather than personal relationships with managers.
Step-by-step explanation:
The statement that in financial accounting (FA), the information provided is subject to Generally Accepted Accounting Principles (GAAP), while managerial accounting (MA) is not bound by GAAP, is true. Financial accounting is predominantly focused on providing financial information to external users such as investors, creditors, and regulatory agencies, and thus must comply with GAAP to ensure consistency and comparability across different organizations. In contrast, managerial accounting is more customized and is used internally by management for making decisions, planning, and performance evaluation, without the need to adhere to GAAP standards.
As a firm grows and the strategy promises future profitability, in-depth personal knowledge of individual managers may become less critical for investors. This shift occurs because there is more publicly available information about the firm's operations, which instills confidence in potential investors. The availability of such data on revenues, costs, and profits encourages outside investors to provide capital even without personal relationships with management.