financial accounting pdf free download

financial accounting pdf free download

The Fundamentals of Financial Accounting: A Comprehensive Guide

1. Introduction to Financial Accounting

Businesses often choose a reporting period of a year-end in order to comply with regulatory requirements. Notably, governments require their businesses to report the profit and loss made and balance sheet position at their year-end. People who invest their savings into companies look to the profit and loss account and balance sheet to judge whether to buy, hold, and/or sell their investments. The reports provide “income” or “fund” as explained in the accounting equation. Posts explain, analyze, and give examples of everyday accounting transactions which are the backbone of financial and cost accounting books for business. They show how accounts appear in the books of accounts and how they relate to one another.

Accounting is a system of recording the financial transactions of a business. This system of recording financially related data seeks to provide a financial picture of the business for either inquiring financial reporting agencies such as the state’s tax office or regulatory bodies. Then again, it is also useful for the inner management of a business. Financial accounting enables managers to be more fully informed about the financial health of a business so that they may then guide the business in a more informed way.

2. Key Concepts and Principles in Financial Accounting

These are the primary financial information sources driving the majority of both financial and management accounting systems worldwide. In the US, the Financial Accounting Standards Board (FASB) and its UK equivalent, the Accounting Standards Board (ASB), issue accounting principles and policies, termed Generally Accepted Accounting Principles (GAAP), to harmonize, standardize, and enhance the comparability and consistency of financial information between organizations. Similarly, the International Accounting Standards Board (IASB) issues equivalent International Financial Reporting Standards (IFRS) to harmonize financial information for international users.

The primary accounting statements are the balance sheet, the income statement, and the cash flow statement. The balance sheet captures an organization’s financial position at a point in time, depicting assets (current as well as long-term), liabilities, and equity. The income statement, organized on an accrual basis, captures profits and losses on an organizational basis, starting with sales revenue, then deducting costs and expenses to determine profit or loss. Finally, the cash flow statement records cash inflows and outflows, sorting them into various activities (operating, investing, and financing activities), to capture the maintenance, financing, and growth activities supported by an organization’s underlying cash flows.

One of the fundamental principles underlying both financial and management accounting is the double-entry bookkeeping principle. The principle dictates that for every debit to a recorded transaction or economic event, there must also be an offsetting credit. As part of this double-entry bookkeeping system, a series of accounting accounts are maintained to record transactions and events. These transactions are then aggregated to create financial statements at the end of an accounting period.

Despite the importance and complexity of accounting, the basic principles and methods underlying accounting are essentially straightforward. By understanding a few core concepts, a user of accounting information can understand how and why transactions are incorporated into the accounts.

3. Financial Statements and Reporting

Financial Statements: The Core Reports Most financial statements, required to be published on a regular basis, are “presented fairly” using generally accepted accounting principles (GAAP) or another complete and comprehensive framework, such as the mostly comparable principles followed in about 100 countries around the world and overseen by the London-based International Accounting Standards Board. In general, two sorts of reporting are prepared and distributed outside the organization: interim, often abbreviated versions for circulation beyond the firm (other than to “official” bodies, such as shareholders or government regulatory agencies) prior to the arrival of the primary data-dense data release, typically delivered at the end of the full year. Separately, both interim and full-year reports disseminated to an entity’s stakeholders provide conforming minimum relevant, reliable data for all interested but non-privileged users.

At their most fundamental level, financial statements are meant to be informative summaries of economic entities’ activities and results for various users, primarily investors, creditors, and equity holders. Providing a compact, concise, clear description of the thousands of ongoing activities of various sizes and types of companies isn’t easy, however, and users should clearly understand the format and content of these reports—what they do and don’t convey, how they’re prepared, and the pragmatic consequences of choices made.

4. Analyzing Financial Data

The third area of financial statement analysis is financial condition analysis. In this aspect, management examines the balance sheet in detail. The balance sheet measures wealth or net assets at a point in time. Management may use additional mathematical tools to determine the contribution of sales, collecting outstanding receivables, collecting owed payables, and managing inventory to statement of cash flow results to determine an organization’s ability to pay bills when due and fund operating activities. They may also examine long-term debt balance associated with assets to determine if the organization has too much debt. Other numerical tools can also assist management in assessing organizational problem areas.

The second aspect of financial statement analysis is corporate income measurement. In this area of concern, questions center on how the organization did in generating revenues compared to the costs incurred in the revenue-generating process. Since the financial statements are general, management uses more sophisticated accounting concepts and financial tools to assist them in making economic measurements of activities over time. The process of economic measurement capitalizes future benefits and costs by using depreciation, amortization, and long-term obligations to determine cost recovery amounts. They may also use tax rules to determine obligations to external interest on the organization’s success in generating wealth.

In general, financial statement analysis can be divided into three areas. The first is operational analysis. In this aspect of financial statement analysis, management examines the percentage changes in the different categories of income statement and balance sheet information to identify trends and possible areas requiring further attention. Management may also compare its change with competitors and industry ratios.

After companies have processed their business transactions and summarized the information into financial statements, the next logical question is, “How does the organization use the information to make informed decisions?” The answer is that management often examines the financial data for relationships, financial weaknesses, and possible changes. This type of evaluation is called financial statement analysis. Financial statement analysis is the systematic examination of the relationships among the financial statement elements and elements outside the financial statements.

5. Ethical Considerations in Financial Accounting

Global business has also begun to provide for the needs and energy requirements of all people. With many companies becoming international, product service, safety, and ecological standards become a means for the business to remain competitive in global markets. Again, accountants are responsible for ensuring that multinational corporations meet these standards by defining and reporting on social responsibilities in an integrated manner with financial information for investors. Today, the Federal Clean Air Act, Comprehensive Environmental Response Compensation and Liability Act, the Occupational Safety and Health Act, and many other federal and state laws regulate these areas. Corporate ethics have therefore developed into an imperative in today’s business world to meet societal needs.

The role of the accountant has significantly expanded in today’s world. This expansion has occurred not only because accountants play a significant role in business but also because corporate social responsibilities are an important aspect of many businesses. The process of globalization has expanded the debate about the responsibilities of corporations. Today’s companies play a large role in the expansion of social welfare. Companies help improve the products of our lives, design more user-friendly and safer cars, electronics, appliances, and other goods, and create a safer work environment.

For example, the issue of protecting the environment may arise, such as when a company must decide whether to undertake actions to maintain the safety and health of the public and its workforce. In today’s world, accountants are important in this debate because they provide the financial means to discuss these obligations. The demand for more corporate social information and more social responsibility has resulted in modern accounting issues intersecting frequently with these professional, ethical responsibilities and obligations.

One of the most important aspects of accounting is financial integrity. This means that accountants maintain a high level of ethical behavior in the workplace. Accountants often have access to banking information, payroll details, investments, and many other sensitive financial documents that require confidentiality. Accountants may also face ethical dilemmas at times. These dilemmas can often conflict with the business goals of ensuring that profits are maximized and the general goals of contributing to society as a whole.