fundamentals of financial accounting

fundamentals of financial accounting

Exploring the Fundamentals of Financial Accounting

1. Introduction to Financial Accounting

A second set of users of financial accounting information includes potential investors. These outside parties may be looking for entities in which to invest funds or companies in which to diversify their investment portfolio. The potential investors will use the accounting information to judge the performance and prospects of the company under consideration. The formation of the appraisal often takes the form of earnings and growth from the investment in a company’s stock. Formation may also be in the form of other financial information released outside the financial statements, but ordinarily this more relevant. Financial analysts and investment advisers are individuals who help individual investors make decisions with respect to investment in corporations through research and analysis of the financial statements. Small businesses also require external financing and often require that financial statements be set to furnish relevant information to potential lenders and other financial to users. The lenders are interested in whether or not the company has the capability to meet its existing liabilities commitments and can provide adequate return on the use of the fund.

The users of financial accounting information are a diverse group. They include owners of the business, financial analysts, and financial advisers. The primary users of owners. In a partnership, the owner is the individual, partnership, family, or other group that has direct proprietary interest in the entity. This owner group is very often referred to as stockholders or shareholders. In proprietorships, comprising the largest number sert owners, receive financial accounting information upon the issuance by the entity of a document called the financial statements. In large business entities, financial statements are issued at least annually. In addition to statements, the release further financial information is often contained in narrative statements explaining the accounting policies used in producing the statements and management discussions that accompany the information. The financial information is used by owners to make informed decisions with regard to the ownership stake.

Introduction: Financial accounting provides financial information to a wide variety of potential users, including management, debt financial accounting are generally less informed of the activities of the entity than the shareholders (owners). Financial accounting information is generally in the form of financial statements that present an entity’s financial position (amounts of assets, liabilities, and equity) at a specific time and the results of entity activities (amounts of revenues, expenditures, gains, and losses) for a specific periodic interval. Financial accounting applies rules, standards, and practices in the recording and reporting of financial information. Financial accounting applies to all types of business and nonbusiness entities.

Outline: – Financial accounting – Elements of financial accounting

An introduction to the fundamentals of financial accounting that will lead a variety of interested users to an understanding of accounting terminology, concepts, and assumptions.

2. Key Principles and Concepts in Financial Accounting

The second important thing in accounting is that measurements are made in money terms. This is called the concept of money measurement. Otherwise, hesitation or interpretation could arise, and the owner of the business would require to be involved in some profit-sharing arrangement with the satellite in addition to those paid a salary. However, so long as profits are expressed in terms of money, all ambiguity is removed. This concept implies that the personal affairs of a proprietor or partner in a proprietorship concern, or members in a partnership business, are completely separate from those of their business. Trading for profit purpose. At regular intervals, profits are measured, usually at the end of a given period of time, typically annually. The need to determine the profit periodically and to finalize the accounts of the business concerns is based on the fact that the same set of procedures applied to any business entity, irrespective of size or legal form, will give varying results at different points in time.

This chapter seeks to acquaint you with some basic accounting concepts and to provide some guiding principles for the study of the subject. Three important concepts in financial accounting are entity, money measurement, and periodicity. You will come across the concept of entity for the first time in Part A of this chapter. It helps make a subject matter of accounting. The moment you want to measure the business operations, you will find that you have to exclude some events and activities. For example, the affairs of the accountant doing the books, his purchase of a car, or his depositing money in the bank would not be recorded in the books of the business. In other words, you have to consider the business operations as being different from the operations of the people who run it or the operations of other business entities. This leads to the concept of entity as one of the fundamental concepts of accounting.

3. Financial Statements and Reporting

The fiscal period covered by financial statements is referred to as the company’s accounting period. This period is typically one year long, but many firms also issue financial statements on an interim basis. These interim periods can be 1 month or 3, 6, or 9 months in length at the end of a quarter or other desirable time period. The most common interim financial statements are for the first and third quarters and may be published by the firm in an interim report along with an interim management comment.

Publicly held business enterprises generally issue three primary financial statements on an annual basis: the balance sheet, the income statement, and the statement of cash flows. The Securities and Exchange Commission and the New York Stock Exchange also require supplemental financial information on a variety of matters such as employee benefit plans, management’s discussion and analysis, segment data, income tax matters, year 2000 exposure, and contractual obligations. In addition, the annual report issued by a company may include a number of other reports, including the auditor’s report, the financial reporting policies used by the firm, and several other reports related to corporate governance.

3.1 The Components of Financial Statements

4. Analyzing Financial Data

Cash Flow Statement: One purpose of the cash flow statement is to report the business’s cash inflows and outflows for a specific period of time.

Income Statement: One purpose of the income statement is to report revenues and expenses for a particular period of time.

Financial Position: One purpose of the financial position statement is to report assets, liabilities, and owner’s equity at a given point in time.

Purpose of Data Analysis Financial data is organized and often reported in business financial statements which include a financial position statement, an income statement, and a cash flow statement. After data has been recorded and summarized in the form of financial statements, business owners, managers, investors, and other analysts must analyze the resulting financial information. A primary purpose of financial statement analysis is to assess the condition and performance of a business. In order to properly assess a business using financial statement information, it is important to understand the purpose of each financial statement.

The seventh step in the accounting cycle is to prepare and interpret the results of financial data. In this section, we will discuss the purpose and use of financial data. Then we will illustrate methods employed in financial statement analysis.

5. Ethical Considerations in Financial Accounting

As a financial accounting student, it is both logical and appropriate that you begin your studies with an exposure to the ethical considerations impacting financial accounting. However, it is not only the accountant who has ethical constraints. From the beginning of his or her career, the accounting student is confronted with an ongoing series of ethical dilemmas upon which laws, accounting standards, and the accounting profession provide guidelines for resolution. Since your career will be spent helping others, you should anticipate the types of behaviors you will be expected to undertake and how ethical decisions will be expected of you throughout your career.

The activities of business entities leave an indelible impact on the lives of countless numbers of individuals. To ensure that business activities do not negatively impact the general economy or portion of the community being served by the business entity, such activities require regulation by society. Failure of business entities to operate within the constraints of society has led to the creation of laws. Finally, to ensure that business entities do not use the services of accountants to intentionally defraud society, accountants are constrained by a code of ethics.