the financial accounting assignment help 

the financial accounting assignment help

The Importance of Financial Accounting

1. Introduction to Financial Accounting

Further, while the goal of financial accounting is to provide information about an economic entity that is useful in decision-making, the information presented is constrained by the need to maintain relevance and reliability. Financial accounting thus operates within the boundaries placed by the conceptual framework. The history of financial accounting in developed economies is long and rich, and early civilizations often recorded their commercial activities in clay tablets. One tablet, found in the ancient city of Lagash (c. 2400 BC) and written in cuneiform (a form of writing developed in the ancient Near East), deals with barley, beer, and bread. It is agreed that farmers usually delivered the barley to the brewers on account, and in that sense, the brewer/company promises to pay in the future. We know that the barley that is delivered has certain characteristics, particularly the weight and the quality, and we quickly appreciate that future transactions depend on these weights and qualities (price/quality of beers). The amount of barley paid was recorded in the tablet, which allowed the brewer to make informed decisions and prompt adjustments based on economic information.

Financial accounting is concerned with recording the business transactions of an organization, summarizing and reporting the results in a set of financial statements. The goal of financial accounting is to provide useful information to enable users of the financial statements to make informed decisions about the allocation of resources. Although society has other methods of allocating resources, financial accounting provides a supplementary method by which to do so: it tells us the economic value of a business unit at a single point in time, its profitability over a specific time period, and the capacity of the business unit to generate future cash flows.

2. Principles and Concepts of Financial Accounting

The matching concept: This concept is associated with the income determination process. It is proper to allocate the total effort for a production process, which includes the time, price, and total expense, during the accounting period of production. Cavity denotes the series of steps or procedures that lead to the preparation of financial statements at the end of a particular accounting period. The beginning of the cavity is recording financial transactions in the books of journal entries. The preparation of financial statements is the heart of the accounting process. The worksheet is a model of target financial statements and balance sheet of a business entity that can be produced. It is a blank working paper made of several columns and rows that portrays the form of the statement account title with the help of model ten thousand numbers.

Financial accounting is based on a number of fundamental principles and concepts that have been termed as the generally accepted accounting principles. The business entity concept: This concept provides that an enterprise is an accounting entity and treated as something distinct and separate from its owners. The business owner and the entity are independent of each other. This concept ensures that every transaction has a double aspect, hence the accounting equation, assets = liability + owners’ equity, is being satisfied. It follows that the financial transactions of a firm must be recorded in the books of account, not the transactions of the owners. The going concern concept assumes that a business entity will continue to operate indefinitely. It is necessary for the use of depreciation and the use of the cost concept.

Financial accounting, on the other hand, is usually directed to outsiders, such as individuals and organizations both inside and outside of the company, of the investment in the firm’s stock. Corporate management is responsible for safeguarding the investment and providing financial accounting information to the investors. In contrast to the investors, company management uses this information for the benefit of the company.

3. Financial Statements and Reporting

Financial statements are the main output of financial accounting. When managers prepare financial statements, they select events and transactions based on two criteria: the element and materiality. The element requires that a basic financial statement have a balance sheet, income statement, and statement of cash flows. Materiality estimates the nature of transaction errors that will affect the judgment of a reasonable person relying on the financial reports. Managers use professional judgment and place more emphasis on the element than materiality in designing financial statements. First, the balance sheet shows a firm’s financial position at a particular point in time. Second, the income statement shows the revenues minus the expenses over a particular time period. Third, the statement of cash flows shows the cash sources and uses for a period. These three financial statements provide useful information and are important for a broader range of users, including the statement of comprehensive income and the statement of changes in equity.

The importance of financial accounting gives the philosophy that accounting has economic and social functions. The former function classifies accounting as a part of economics. The latter function classifies accounting as an information system. In short, accounting is explained as an information system that processes economic data into economic information and transmits it to interested persons. In these classifications, it is expressed that financial accounting produces economic information and transmits it in the form of financial reporting. Financial reporting is the process of identification, measurement, accumulation, aggregation, summarization, inspection, analysis, interpretation, and transmission of economic information to external parties.

4. Analysis and Interpretation of Financial Data

To make finer comparisons for the supermarket, measures are derived so that we are comparing apples with apples all the time. If we want to see whether Jakure is maintaining its activity levels, we look at the turnover. If the turnover trends are upwards, then they are progressing well. If they are going downwards, then they need to find a better approach to running the business. Running a business, however, is not only about the turnover. The books must be able to show us whether the supermarket is creating enough gross profit to cover operating expenses. Indicated here is that an acceptable level of detail must have been maintained with accounting records that will allow us to derive all these measures over this period. This is why it is important for the business to spend a little bit of time creating reliable and useful accounting records. With these records at the disposal of the accountant, we can do comparisons and data interpretation in order to get useful information for the business.

There is more to accounting than just inputting and recording data. From the data, the accountant derives financial information that can be very useful to the business. This financial information is organized, analyzed, and interpreted. The techniques useful for this analysis and interpretation are called financial statement analysis. One way to arrive at financial statement analysis is to compare the financial statements for a number of different accounting periods. For a supermarket, Jakure, a comparison of sales for the period January 2005 to December 2007 will give us an overview of how the supermarket performed during this period.

5. Role of Financial Accounting in Decision Making

Financial position and/or profit potential of the companies. Measures and/or attainment of corporate objectives. Earning power of the company. Quality of the management of the companies. Fair level of dividend distribution by the companies. Fair price of the shares and the extent and pattern of the appreciation or depreciation of such shares. Comparative assessment of local or nationwide investment opportunities. Suitability of particular investment as compared with other alternatives. Liquidity and solvency of assets. Economic security of employees. Performance efficiency of competitors or business partners.

Decisions based on financial accounting information (actual or expected) have become rather comprehensive because of the disclosure of information overload, investor sophistication, and technological advances. Such decisions are also taken in the following areas by several users of financial accounting information, regardless of whether the decision utilizes the information conveyed directly through financial statements or through reports on performance presented through the press or made known at general meetings of enterprises or through other documents.

Determining the routine activities of the business and the returns flowing from such activities. Determining the profitability and the financial condition of the business. Enabling investors (both present and potential) to make decisions. Decisions of the management relating to grants of stock options, voting on the basis of stock holding, payment of dividends, buy-back of shares, etc., are influenced by financial information, such as earnings per share, rate of return on investment, dividends paid from profits, etc. Enabling creditors to evaluate the risk of a company defaulting payment on loans and sell the loans on the secondary market. Facilitating decisions of government, such as those of fiscal authorities, monetary authorities, etc., by providing details of the financial health of companies and industries of national importance. Enabling credit rating agencies to evaluate a company’s financial performance and the extent of credit risk associated with the agency’s debt securities. Helping laborers to negotiate for alternative amounts and structures of wages and benefits and to safeguard or improve their conditions of work (wages and other benefits). Facilitating underwriters to evaluate whether the company is a desirable objective if the underwriters have a mandate to judge investment opportunities that look attractive from the standpoint of traditional value.

Financial accounting is primarily concerned with the preparation of financial statements for the information of persons outside the business (such as shareholders, industrial analysts, creditors, government agencies, etc.). Financial accounting has several objectives such as: