harvard business school online financial accounting

harvard business school online financial accounting

The Importance of Financial Accounting in Business: A Comprehensive Guide from Harvard Business School Online

1. Introduction to Financial Accounting

This perspective does not belittle the great importance of first collecting and then condensing important financial transactions into the actual accounting statements that you want to use. However, although their result, the formal financial report, is not your primary interest, the steps and limitations of their construction need to be.

We will concentrate on the detail you need as a user or potential user of accounting reports from outside the firm to know about the mechanics of accounting events. After all, you do not plan to work for an accounting firm or as the controller of the accounting office of a firm where your success in part depends upon absolute accuracy in the minutiae of accounting procedures. Rather, you simply want accurate information that either is explicitly in the form of accounting data (like a financial report) or ultimately is translated into accounting data (like a yet-to-arrive federal budget deficit).

This course – following the final portion of Introduction to Financial Accounting – will give you a set of tools to use that allows you to critically read already existing stories or where necessary to write your own fresh chapter of the financial accounting story.

If knowing how to understand and use financial accounting data is important to your business or career, you have come to the right place. Financial accounting is the language of business. It is the vehicle through which we tell our story – how parts of the firm work, the context of our firm within our industry, the historical performance of the firm, and the larger economic reality in which our firm operates.

2. Key Concepts and Principles in Financial Accounting

The reason it’s very hard to measure them is because the assets may be unique and have no market or because the timing of the cash flows is uncertain. Financial accounting is about terms of trade and reporting conventions. Transactions are chameleons in that they can wear many different faces depending on how aggressive you want to be in terms of recognizing earnings. Financial accounting is also about recording and reporting. You have to keep track of the company’s account balances and then you have to report the outcomes in a coherent, well-organized way. Last but not least is that financial accounting is credible. One of the key elements of financial accounting is to inject into the system mechanisms that will make the information that you produce far more credible than what companies might produce by themselves.

There are five fundamental elements that underlie financial accounting. The first is to identify the transactions that go into financial accounting. Companies do thousands of transactions all the time. Financial accounting is about recording, measuring, and reporting a somewhat discrete set of transactions. These are typically transactions that are material in size or potentially misleading in some way. This is a legal concept as well as an economic concept. The second concept is measurement. Financial accounting is about measuring the financial impact of transactions. Accountants are often called upon to measure transactions that are very hard to measure.

Understand the five fundamental elements of financial accounting.

3. Financial Statements and Analysis

This article is a comprehensive guide to financial accounting concepts and more. It has everything you need to know on this topic. In this section, you’ll begin learning the broad principles of measurement by considering the most basic financial statements: balance sheets, income statements, and statements of retained earnings. As these statements are constructed from the results of business activities and as they summarize what a business owns and owes, who it is indebted to and who owns it, let’s begin with a description of business activities. A business at any point in time owns resources or, as the accounting profession is inclined to specify it, has economic resources. These can be shown at any one time in the balance sheet – a statement that presents the business’s planned activities, but that does so from the business’s perspective. Alternatively, the balance sheet can be viewed as a picture or listing of what the firm owes, to whom it owes these claims, and who wants to share in the ownership of these resources. Remember that an asset is a resource that is expected to produce future economic benefits. A business owes liabilities, being obligated to make future disbursements to others, and has retained earnings. Retained earnings is the owners’ interest in the business. Taken together, the sum of all liabilities and the owner’s interest in the business is equal to the sum of all business assets.

4. Accounting for Business Decisions

Accounting is a language of business, helping people from different firms and industries to understand and accurately evaluate the actions and results of other firms, as well as to assess the firm’s position. As such, the presentation of financial information to analysts, shareholders, business partners, and employees requires consistency in the financial reports of firms. Without consistent reporting practices across all firms, financial reports would not be generally useful for decision-making, and establishing a common language of business would be very difficult indeed. The collection and presentation of financial data, as enshrined in the U.S. Generally Accepted Accounting Principles (GAAP) by the Financial Accounting Standards Board and the International Financial Reporting Standards by the International Accounting Standards Board, have led international efforts to provide a “common language” and to minimize the differences in financial information across the world. The information provided by financial reports constitutes the public “face” of the firm that is shown to the world. It is critical to ensure that data owners safeguard the interest of stakeholders by preparing complete and accurate financial statements.

Once businesses have implemented their accounting systems, the next key question is “What information should be produced and used, and when should it be produced?” The fundamental purpose of financial accounting is to provide meaningful and useful information for decision-making and to establish a uniform approach in the preparation of firm-specific information that is generally useful and universally understood. The most basic financial documents are the income statement and balance sheet. These “snapshots” summarize the performance of the firm and the assets, liabilities, and equity of the firm at a point in time and are prepared and presented for the use of both internal and external parties.

5. Advanced Topics in Financial Accounting

Making Financial Reports Important for Stewardship: A steward is someone who plays an influential role in shaping what an organization will look like in the future. One common type of steward is a shareholder. Shareholders are often interested in whether the managers they hire as agents do what they are paid to do – implementing strategies that create value. To judge the value and validity of the managers, shareholders look for hard evidence. They study the skills and reliability of managers who claim to be responsible and compare their track record with other stewards or companions. They also identify the transactions that influence the firm’s competitive advantage and track the benefits shares of the firm’s assets and returns. They also measure the liquidity, profitability, and market value of shares frequently using financial statements.

This chapter first discusses the reasons behind the most controversial financial accounts. Then it provides a comprehensive account of how to deal with them.

Shareholders are often faced with various complex financial reporting matters in the real world. For example, they need to understand why accounting standards require specific expenses, such as operating leases and impairments, to be recognized on financial statements. They also need to understand the implications of recognizing intangible assets, how derivatives are accounted for, and what the theoretical and practical limitations of fair value accounting are. Additionally, they need to know how emerging issues affect both the quality and relevance of financial statement information so that they can read through the form and identify the most important and relevant information for their evaluation.