principles of financial accounting

principles of financial accounting

Exploring the Principles of Financial Accounting

1. Introduction to Financial Accounting

The font size in this book’s print is – well, dyslexia-friendly – as Financial Accounting – as suggested by its title – is the history of business. This term paper is a synopsis for the various terms in accounting, their meanings and how they are used in the everyday business life. What follows hopefully demonstrates the importance of learning financial accounting principles. Upon completion of this book learners should have developed an improved ability to understand and apply a standard business pandemic plan with cash flow and debt management considerations financially embedded. The author assumes some of you are business owners who are conversant with the basics of accounting, so you might be inclined to skip to chapters of interest that have been highlighted within quotes in this syllabus. Still, it would be an instructive exercise to read each chapter to gain a deeper understanding “in order to keep pace.”

Welcome to Financial Accounting! Many students understand that they have to learn about bookkeeping, generally associated with junior accounting clerks who keep business records, but do not understand its importance. Let the author assure you that maintenance of the firm’s records is just as important as securing a mission statement and detailed business plan. Financial Accounting is sometimes referred to as the “language of business,” particularly since its principles are so deeply grounded in the need and ideology of business to provide the services, needs, and goods of society. Whether an individual or organization is making an investment, planning for future needs and growth, analyzing, or making management decisions, or decorating a room in extensive renovations, financial accounting concepts and principles provide the cornerstone of useful information.

2. Key Concepts and Principles in Financial Accounting

In addition to relevance, the context within which financial accounting information is useful includes its comparability to other organizations, consistency over time, as well as freedom from material error or bias. With this information, financial statement users can better draw conclusions about the financial wellbeing as well as performance of the business. Finally, a material content of financial reporting must be audited in the form of audits or reviews to ensure the remaining financial statements provide representation trust. For businesses with publicly traded securities, the Securities and Exchange Commission (SEC) requires issues of these financial statements to undergo an annual financial statement audit.

Given the straightforward nature of transaction-based circumstances explored in financial accounting, a few important principles highlight the underlying landscape. First, why are financial transactions recorded at the point of occurrence? Time relationships may allow information contained within those financial statements to become irrelevant to decision contexts or may reduce credibility, accuracy, or reliability of the information. Second, rules and guidelines have developed to guide businesses in preparing financial information that is useful and relevant. Why is information in financial accounting relevant? Financial accounting information should be relevant, provided it is useful and can be reliably compared to that from the other organizations.

3. Financial Statements and Reporting

The objectives of financial reporting, as discussed by the American Institute of Certified Public Accountants, center on the needs of external parties, that is, individuals or groups not actively involved in running the organization. No direct statement is made on the use or benefit to an organization of its financial statements. For internal planning and control purposes, detailed financial statements, because of the formal, detailed recording requirements, are not used, but selective operating data usually in a form different from that of financial statements are found to be just as useful.

As a result of the financial transactions of organizations, financial achievements have to be reported at regular intervals. When a comparison of business performance is required – whether by the owners or by the public – detailed financial statements must be prepared at the end of each accounting period. These statements provide the means by which individuals and groups not actively involved in management can assess the financial condition of an organization and individuals. Differences of opinion are almost inevitable from the use of different accounting principles, and the reader of financial statements must bear in mind the assumptions on which they are based.

4. Analysis and Interpretation of Financial Information

4.2 Purpose of analysis and interpretation of financial information During the past several years, an increased body of knowledge has developed about the analysis and interpretation of financial information. Information which cannot be subjected to intelligent analysis tends to be ignored. Good financial accounting systems will provide information for rough-and-ready analysis, involving simple indices and relatively minor manipulations. It cannot be overemphasized that any single measure is almost meaningless. The ability to forecast future income and cash flows is determined primarily by the degree of variability of the assets and the liabilities and the relationships which exist between them. For example, if we are analyzing a steel company with large inventories selling at a level substantially over recent replacement costs, the value of the inventories is likely to be overstated. The values of the other assets are not vulnerable and may be predictably conservatively stated.

4.1 Purpose of analysis and interpretation of financial information The purpose of analysis is to provide the information desired by diverse users of financial statements. For example, a stockholder might want to know how well the enterprise has done this year in order to evaluate the risk of ownership. He is concerned with the net margin relative to the total capital invested, the trend of that margin, and the reasons for changes shown. Creditors need to know whether the enterprise is probably able to meet maturing obligations on schedule. It indicates whether or not salaries, management bonuses, and dividends are likely to be covered by income earned. Management will want to know how well the enterprise has done this year and why, how well different sections of the enterprise are operating, and where the operation of the internal controls could be improved. Potential investors and takeover bidders will be interested in liquidity and in the liquidity trend.

5. Ethical Considerations in Financial Accounting

An accountant’s role as a provider of independent, impartial data helps ensure that financial information is the most reliable resource available for the public’s use. This reliability becomes impossible when an accountant’s impartiality is compromised because of a belief that the accountant is acting in someone else’s interest, rather than in the public interest. The financial stake in an impartial data-gathering process has been recognized by all levels of government. Whether at the federal, state, or municipal levels, government has the right to collect fairly and reasonably taxes and properly set budget appropriation levels based on the assumption that the information it receives is fiscally accurate. Businesses also depend on using independently audited data because it provides the business, as well as various other external parties, with reliable financial information.

Accounting is a profession that relies on its ethical standards to maintain credibility, reliability, and relevance. Companies rely on objective accountants to provide impartial, independent, and accurate opinions concerning the company’s financial and operating results. Consequently, accountants are often called on to act as watchdogs over the preparation and reporting of financial data. In performing this function, the accountant must issue financial information which is based on factual data, presents an accurate picture of the company’s operations, and is prepared according to the generally accepted accounting principles (GAAP).

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