High Quality
Open the downloaded document, and select print from the file menu (PDF reader required).
Introduction
Financial accountancy
(or
financial accounting
) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such asstockholders,
suppliers, banks, employees,government agencies,owners, and other stakeholders. The
fundamental need for financial accounting is to reduce principal-agent problem by
measuring and monitoring agents' performance and reporting the results to interestedusers.Financial accountancy is used to prepare accounting information for people outside theorganization or not involved in the day to day running of the company.Managerialaccountingprovides accounting information to help managers make decisions to managethe business.
Objective of Financial Accounting (FA):
The objective of financial accounting is to collect accurate, systematic, and timelyfinancial data and other financial information, and to compile and consolidate it in anorganized and systematic way, according to the principles and rules of accounting, for reporting purpose.The financial managers use these reports to assess the financial position of the companythrough various financial management tools and then the financial position can becompared to, or benchmarked against, the industry norms. The four different financialstatements used for the purpose of reporting and analysis are1. Balance Sheet2. P/L or Income Statement3. Cash Flow Statement4. Statement of Retained Earnings (or Shareholders’ Equity Statement)In financial accounting, assets are recorded on the basis of historical costs in the balancesheet, i.e., the assets are recorded at their original purchase price. Of course, thedepreciation on the asset is duly subtracted from its original value as the asset remains inuse of the business.However, in financial management, book value is seldom used and financial managersconsider the market value and the intrinsic value of assets.Market value may be defined as the value currently prevailing in the market or the valueat which the sellers are ready to sell, and buyers are ready to buy a particular asset.Intrinsic value or the fair value is calculated by summing up the discounted future cashflowsObjective of Financial Accounting (FA):The objective of financial accounting is to collect accurate, systematic, and timelyfinancial data and other financial information, and to compile and consolidate it in anorganized and systematic way, according to the principles and rules of accounting, for reporting purpose.The financial managers use these reports to assess the financial position of the companythrough various financial management tools and then the financial position can becompared to, or benchmarked against, the industry norms. The four different financialstatements used for the purpose of reporting and analysis are
1. Balance Sheet2. P/L or Income Statement3. Cash Flow Statement4. Statement of Retained Earnings (or Shareholders’ Equity Statement)In financial accounting, assets are recorded on the basis of historical costs in the balancesheet, i.e., the assets are recorded at their original purchase price. Of course, thedepreciation on the asset is duly subtracted from its original value as the asset remains inuse of the business.However, in financial management, book value is seldom used and financial managersconsider the market value and the intrinsic value of assets.Market value may be defined as the value currently prevailing in the market or the valueat which the sellers are ready to sell, and buyers are ready to buy a particular asset.Intrinsic value or the fair value is calculated by summing up the discounted future cashflowsTHE
IMPORTANCE OF FINANCIAL INFORMATION.
A.Financial information is the
HEART OF BUSINESS MANAGEMENT.
1.Most of us know almost nothing about accounting fromexperience.2.However, you have to know something about accounting if youwant to understand business.3.It is almost impossible to run a business effectively without beingable to read, understand, and analyze accounting reports andfinancial statements.B.Accounting reports and financial statements are as revealing of theHEALTH OF A BUSINESS as pulse rate and blood pressure reports are inrevealing the health of a person.II.
WHAT IS ACCOUNTING?
A.
ACCOUNTING
is the recording, classifying, summarizing, andinterpreting of financial events and transactions to provide managementand other interested parties with the information they need to make gooddecisions.1.
FINANCIAL TRANSACTIONS
include buying and sellinggoods and services, acquiring insurance, using supplies, and paying taxes.2.An ACCOUNTING SYSTEM is the methods used to record andsummarize accounting data into reports.B.
PURPOSES OF ACCOUNTING:
1.To help managers evaluate the financial condition and theoperating performance of the firm so they may make better decisions.2.To report financial information to people outside the firm such asowners, suppliers, and the government.
C.Accounting is the measurement and reporting of financial information tovarious users regarding the economic activities of the firm.III.
AREAS OF ACCOUNTING.
A.Accounting has been called the
LANGUAGE OF BUSINESS,
but it alsois the language used to report financial information about nonprofitorganizations.B.
MANAGERIAL ACCOUNTING.
1.
MANAGERIAL ACCOUNTING
is used to provide informationand analyses to managers within the organization to assist them indecision making.2.Managerial accountants:a.
MEASURING AND REPORT COSTS
of production,marketing, and other functions. b.
PREPARING BUDGETS
.c.Checking whether or not units are
STAYING WITHINTHEIR BUDGETS.
d.DESIGNING STRATEGIES TO MINIMIZE TAXES.
3.A
CERTIFIED MANAGEMENT ACCOUNTANT
is a professional accountant who has met certain educational andexperience requirements and been certified by the Institute of Certified Management Accountants.C.
FINANCIAL ACCOUNTING.
1.The information provided by
FINANCIAL ACCOUNTING
isused by people
OUTSIDE
of the organization (owners and prospective owners, creditors and lenders, employee unions,customers, governmental units, and the general public.)a.These external users are interested in the organization’s profits and other financial information. b.Much of this information is contained in the company’s
ANNUAL REPORT,
a yearly statement of the financialcondition and progress of an organization covering a one-year period.2.It is critical for firms to keep accurate financial information.a.A
PRIVATE ACCOUNTANT
is one who works for a
SINGLE COMPANY OR ORGANIZATION.
b.A
PUBLIC ACCOUNTANT
is one who provides servicesfor a fee to a
NUMBER OF COMPANIES.
c.
PUBLIC ACCOUNTANTS
help firms by:1.Designing an accounting system for a firm.2.Helping select the correct computer and software torun the system.3.Analyzing the financial strength of an organization.3.The accounting profession assures users of financial informationthat financial reports of organizations are accurate.
Add a Comment
sanjib kumar samalleft a comment
krishnan2001left a comment