fundamentals of financial accounting read online

fundamentals of financial accounting read online

Exploring the Fundamentals of Financial Accounting: A Comprehensive Guide

1. Introduction to Financial Accounting

Each of these accounting principles is discussed in detail in the upcoming sections, along with the corresponding accounting standards. The adequacy and efficacy of these accounting principles have been subject to ongoing debate and scrutiny, and they have undergone numerous changes over the past two centuries. As such, the underlying fabric of accounting is evolving and it has become an essential and inseparable part of the business environment. The primary goal of business is to maximize profits and ensure long-term growth and stability. Amid this pursuit of excellence, accounting primarily acts as an informational system that, without bias and using historical data, shows how the decisions that a company makes impact company performance and are reflected in the ongoing success of the company. Although the role and services offered by accounting may change to meet changing economic conditions and financial environments, the fundamental functions of accounting remain in conforming to the accounting concepts and principles and abide by international accounting standards.

Financial accounting is the generation of financial reports at regular intervals so that the members of a company, known as stakeholders, can understand and analyze the economic health and position of the organization. In financial accounting, the financial data of an organization is communicated to the stakeholders through financial statements called profit and loss account, balance sheet, cash flow statement, and statement of retained earnings. The financial statements summarize the accounting and transactional activities of the company and convey this information to the company’s stakeholders, including shareholders, employees, management, public authorities, research organizations, and many others. There are several principles governing financial accounting: the four key and basic principles guiding financial accounting are objectivity, consistency, integrity, and relevance.

2. Key Concepts and Principles in Financial Accounting

The financial accounting body is required to have a common structure to facilitate changes in needs, concepts, definitions, principles, accounting descriptions, and in terminology. This is necessary to achieve standardization within the financial accounting field. Standard and consistency in financial reporting are very important as the users of accounting and financial information are general users. These are the investors, creditors, and potential investors and creditors who rely on this information to make decisions about obtaining extension of credit or earnings. The financial reporting must be transparent in order to provide information to help them assess the prospects of the enterprise to generate net cash inflows in the future.

B. A Common Structure of Financial Accounting

Following FASB’s conceptual framework, accounting information is relevant when it has two aspects: predictive value and confirmatory value. Relevance which can predict what will or will not occur in the future and that which provides feedback about the prior expectations that were formed. Much published accounting research examines earnings data in terms of earnings relevance. For example, an analyst who can forecast earnings to provide valuable information to compare performance with that which was expected. The research on earnings persistence provides the confirmed value attribute of relevance. If earnings are persistent over time, the information has a higher degree of relevance from expected.

The concept of accounting is concerned with the preparation and provision of useful information for users so they can make informed decisions. Because there are various subsequent decisions that users must make, they use financial information to identify key elements of various critical decisions they make. This financial information provided by accounting is as follows: for a user, it must first be relevant and able to provide a basic structure for the decision making. This is the informational process; an event occurs, and the user enters a period of information gathering, then decisions are made based on this information. This is regarded as the decision-making process. Research has shown that there are three fundamental decision-making processes-quality decision-making situations: investment decision making, lending decision making, and stewardship decision making.

A. The Concept of Financial Accounting

3. Financial Statements and Analysis

The income statement summarizes all of the organization’s revenues generated and the expenses incurred during an accounting period. The statement also evaluates the organization’s performance over a period of time, typically a month or year. The balance sheet lists the organization’s assets, liabilities, and equity at a single point in time. It provides a picture of the organization’s financial position at a specific point in time, similar to a snapshot of an organization. The statement of cash flows analyzes the cash inflows and outflows of the organization generated by operating, investing, and financial activities. It captures where the cash came from and how it was spent. The statement of changes in stockholders’ equity combines the income statement and balance sheet by analyzing the equity component to understand the change in the period. Each statement, when taken together, provides users with a comprehensive picture of the organization’s overall financial position, financial performance, and future cash flows.

When we examine financial statements, they consist of at least five specific components: (1) income statement; (2) statement of changes in stockholders’ equity; (3) balance sheet; (4) statement of cash flows, and (5) footnotes. Each of the four major financial statements captures transactions that occur during the accounting period. These statements are prepared following specific accounting rules and guidelines.

4. The Role of Technology in Financial Accounting

In this chapter, we will explore the role of information technology in financial accounting, including management accounting. The use of computers and networks began as “behind the scenes” processing in the late 1940s (economic events and electronic processing), moved to “adding machine” type calculations using application-based programs (Simple Direct Calculation Programs), added the networking factor in the 1970s and became a distributed resource for finance personnel, began providing information support tools by the 1990s, and now the tools serve as the foundation for electronic commerce in its many widespread forms. The taking short appears to be direct debit relief for payments to finance and banking companies, which needy credit users are turning to because businesses have been waiting longer for their receivables from their customers. With the financial systems in place, the banking system can support into the revenue cycle as a valuable source of cash through payment services that debit quickly from the customer’s accounts.

SassMan is the corporate controller at Mambo Development. His assistant, FunKatrina, is responsible for the accounts payable and financial information systems. FunKatrina is attending a financial and accounting trade show and seminar. As she is looking through the literature from different technology companies, she remembers that Mambo Development will need a new financial information system soon. She knows that she should update technology periodically so that these assets will not become obsolete. “Outdated assets become more of a liability and become less useful in producing useful outputs, and knowledgeable accountants will not want to work for a high-tech laggard,” she notes to herself. FunKatrina emails the managing partners that she is coming across some interesting presentations and price comparisons of financial information systems. SassMan, the controller, is all for updating the financial technology but wonders about the efficiency and effectiveness of the accounting and finance processes. FunKatrina remembers what FritzFuld has always told her, “Automation and information technology will not improve outdated, poorly structured accounting and finance processes.” She decides to take a lot of notes and not attempt to deliver too many leg movements at the dance party tonight for complete clarity during her discussions of the conference over a working lunch with the partners.

5. Ethical Considerations in Financial Accounting

In Nigeria, the Institute of Chartered Accountants of Nigeria (ICAN) was founded in 1965 to address issues such as the ethical responsibilities of accountants in the country. The mission of the ICAN is “to produce world-class chartered accountants who are well versed in the discipline, are knowledgeable in critical areas of the economy and society, and will deploy the art of accountancy and other management disciplines to maximize capital formation and social well-being anywhere in the world”.

An accountant has obligations to many different individuals and groups. It is not always easy to meet the conflicting responsibilities to each of these groups, particularly when the needs of one group are in conflict with the needs and interests of others. In financial accounting, these conflicting interests are often best illustrated when considering an auditor’s responsibility to the professional accounting associations, the management of the business, the existing and potential shareholders, and to creditors and tax authorities. Balancing the responsibilities to each group is difficult, as can be seen when auditing a business at the direction of the management when the audit report will be made public. In all these cases, the judgment and ethical behavior of the accountant enter into the relationship between the accountant and the various groups.