FINANCIAL ACCOUNTING

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The Objectives of Financial Accounting

Financial statements are the primary means of communicating financial information to parties outside the
business organization.
Most companies prepare financial statements at the end of the quarter (called quarterly reports) and the
end of the year (called annual reports).
Financial Accounting concerned with the preparation of financial statements for decision makers, such as
stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of constant
purchasing power. The fundamental need for financial accounting is to reduce principalagent problem by
measuring and monitoring agents' performance and reporting the results to interested users.

Business Background

Business owners (called investors or stockholders) look for two sources of possible gain:
1. Sell ownership interest in the future for more than they paid
2. Receive a portion of the companys earnings in cash (dividends).

Creditors lend money to a company for a specific length of time and gain by charging interest on the
money loaned.

Understanding Business Operations

BUSINESS TYPES:
Role Trader, business owned and operated by one person
Partnership, business owned and operated by two o r more people
Company, business owned and operated by many people

All businesses have an accounting system that collects and processes financial information about an
organization and reports information to decision makers, such as Business managers (internal) and
Investors (external)




Company
Operation as
business
Accounts for
Transactions
FINANCIAL ACCOUNTING
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1. Financial accounting is a production of summary financial statements for external users, such as
investor, lenders, government, suppliers, costumers, competitors and the publics. The
presentation of financial accounts is very structured and subject to many more rules than
management accounting.
2. Management accounting is a production of details account for internal use. Its concentrates on
reporting to people inside the business entity and is used to provide information to employees,
managers, owner-managers and auditors. Management accounting is concerned primarily with
providing a basis for making management or operating decisions.

Accounting consists of two elements:
Recording, transactions must be recorded as they occur in order to provide up to date information for
management
Summarizing, the transactions for a period are summarized in order to provide information about the
company to interest parties.



Information Conveyed in Financial Statements

The four basic of financial statement:
Incoming statement, reflects the performance of a business over a period of time
Statement of cash flows, reflects the changes in balance sheet accounts and income affect cash and
cash equivalents, and breaks the analysis down to operating, investing, and financing activities
Statement of Retained Earnings, explain the changes in a company's retained earnings over the
reporting period
Balance Sheet, reflects the summary of the financial balances of a sole proprietorship, a business
partnership or a company





THE USER OF FINANCIAL STATEMENT

FINANCIAL ACCOUNTING
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The Balance Sheet

Body of the Statement
Assets
Economic benefits owned by the business as a result of past transactions.
Liabilities
Debt or obligation of the business that result from past transactions
Stockholders Equity
Amount of financing provided by owners of the business


FINANCIAL STATEMENT
Management
Investor
Customer
Supplier
Lenders Government
Competitors
Publics
Employees