Financial accounting

Week#1
 Financial accounting
• A field of accounting that treats money as
a means of measuring economic
performance instead of as a factor of production.

• The process of recording, summarizing and

reporting the myriad of transactions from a
business, so as to provide an accurate picture of
its financial position and performance
 Financial accounting
• Financial accounting, however, is a subsection of the general field of
accounting that focuses on gathering and compiling data in order to
present it to external users in a usable form.
• Basically, financial accounting's main purpose is to provide useful,
financial information to people or groups outside of companies often
called external users.
• Unlike company management or internal users, external users of
financial information are not directly involved in running the business
or organization. They are outsiders to the business and only have
limited information about companies' operations, financial position,
and well being.
• External users need financial information about companies in order to
support their financial decisions.
 Objectives
• The primary objective of financial accounting is the preparation of financial
statements - including the balance sheet, income statement and cash flow
statement - that encapsulates the company's operating performance over a
particular period, and financial position at a specific point in time.
• These statements - which are generally prepared quarterly and annually,
and in accordance with Generally Accepted Accounting Principles (GAAP) -
are aimed at external parties including investors, creditors, regulators and
tax authorities.
• Firms initially began providing such accounts to provide important
information to their shareholders and loan creditors. Without reliable
information, it is much riskier to grant capital to a business. In turn, lenders
and shareholders compare final accounts among different companies to
look for higher-quality prospects.
 Users of financial accounting
• Shareholders or Investors
Shareholders and other investors are usually the first group of
external users that comes to mind. Investors in general want to
assess the value of a company in order to decide whether it is worth
buying, selling, or holding their stock. Investors read financial
statements to help predict future performance and company worth.
• Lenders or Creditors
Lenders or creditors also use financial statements to base the
decisions on because they want to know if a company is
creditworthy enough to pay off its current loans or borrow
additional funds. Creditors study financial statements in order to
analyze the liquidity and sustainability of a company.
 Users of financial accounting
• Customers
customers study financial statements before making major purchases.
For instance, large companies like GM will study financial statements
of their potential suppliers in order to make sure they are fiscally
sound. A company, like GM, benefits from long-term relationships with
its suppliers. It wants to make sure of potential suppliers' longevity
before it goes into business with them.
• Suppliers
Suppliers also use the financial statements of customers to judge
whether they are creditworthy enough to extend credit. For example,
if a customer orders 100,000 units from a supplier, the supplier wants
to know whether the customer will be able to pay for these units
before the supplies incurs the expense of producing them.
 Users of financial accounting
• Regulators like the SEC and IRS use company financial
statements to make sure the companies are following
applicable laws. The SEC monitor publicly traded
companies to reduce fraudulent business activities;
whereas, the IRS is mainly focused on tax collection and
compliance.
• Unions
Labor unions use financial information to judge whether
employee wage rates and benefit packages are fair. They
also use this information to assess future job prospects
and bargain for higher wages and better benefits.
 Users of financial accounting
• Brokers and Analysts
Brokers and analysts are often potential investors that use
financial information about companies to chart performance
trends and growth rates. These external users create reports that
influence current investors opinions and actions.
• Press
Finally, the last main external user is the press. Although the
press doesn't use financial information for its decision bases, it
does report on the financial information of companies. Networks
like Yahoo Finance and MSN Money are multi-million dollar
businesses that simply report financial information about other
companies.