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Expenses, revenue, profits, liabilities, etc., are all significant factors that adds up or depreciate in the standing of a business. Moreover, for external stakeholders, it is important to know about the fiscal and company value of any organization so that they continue the business. But how do you think all of this is possible and managed? We need financial accounting for it.
Financial accounting provides fiscal and company value to external stakeholders in a detailed manner. Moreover, it is a way for investors and owners to acknowledge all the profits, expenses, revenues, etc., of an organization. So, whether you need to increase your company’s goodwill or raise capital, you need to show your performance to outsiders. And for that, you need financial accounting.
In this blog of All Assignment Help, we will discuss financial statements, financial accounting, its objective, and its qualities.
Understanding Financial Accounting
Financial accounting is the procedure of preparing financial statements for companies. These financial statements are used to show the financial ups and downs to the external stakeholders. Also, it shows the position of the company to its relevant people. Moreover, the users of financial statements are of two types. These are inside users and outside users.
Furthermore, the inside users are the people who work within the company, i.e., the management and staff. On the other hand, outside users are those are connected to the company but not from within the company such as investors, suppliers, creditors, and customers of the company.
Additionally, accountants use standardized guidelines to record transactions. It summarizes them to present a financial statement. Hence, these financial statements are:
- Balance sheet
- Income statement
- The cash flow statement
- The statement of retained earnings.
In addition to this, financial accounting as a subject can be complex and you might need expert assistance. In such a situation, you can seek financial management assignment help. Furthermore, you must know that companies issue financial statements at fixed intervals. These statements are considered externals. Because they are to be handed over to the outsiders like investors.
Furthermore, the primary recipients of the financial statements are owners and stockholders and some lenders as well. Also, it depends upon the structure of the company, and to which length will the financial statements be regulated.
Therefore, if a company or corporation’s stocks are traded publicly, then it is obvious that the statements will be circulated widely to a number of secondary recipients such as competitors, employees, customers, investment analysts, etc.
Objectives of Financial Accounting
Primarily, financial accounting focuses on producing a general-purpose financial statement. This statement meets all the requirements of regulation and assists outsiders in making an informed decision about the fiscal status and value of the company. Moreover, given below are some other objectives of financial accounting.
- Financial accounting helps in systematically regulating transaction records. Hence, it becomes easy for accountants to analyze transactions for formulating financial statements. Furthermore, it helps end users in drawing actionable insights.
- It helps in determining the profitability of the company. Firstly, the profit and loss accounts of the company are compared for management and stakeholders to decide whether they need to sustain the positive outcome or improve performance. Also, both negative and positive results are shown in the financial statement.
- Financial accounting assist in determining the financial health of the company. With the help of the report, owners and investors can determine an appreciation in assets or an increase in liabilities. Furthermore, financial statements also demonstrate the solvency and liquidity positions of a company.
- With the help of financial statement analysis, stakeholders can gain all the required information to make rational decisions regarding a business.
Fundamental Qualities of Financial Accounting
The conceptual framework of financial accounting must have accurate reports so that it can showcase following qualities.
- Pertinence: financial accounting makes sure that it composes accurate report with which audience can make their decision about the health and value of the company.
- Credibility: the information provided in financial statement must be free from any misleading data, must be factual and verifiable.
- Consistency: information from several periods must have similar reporting standards so that one can rely on financial statements.
- Timeliness: with the help of financial statements, users must know the financial standing of a company before they make any decision.
- Comparability: financial accounting is a way with which several organizations can prepare their health (financial) reports using the same standards so that investors can compare and make investment decisions.
- Understandability: with financial accounting, a company can provide information in easy to understand and clear manner.
Financial Statements
Usually, companies prefer to put the quarterly and annual financial statements together. Then they make them available for shareholders and the investing public. Moreover, there are four fundamental financial statements used in the corporate world.
Income statement
The income statement is also known as the profit and loss statement. It covers a particular period of time. Moreover, this period can be a year or a quarter. This statement shows profitability in a specific time period. The major components of the income statement are revenues, expenses, gains, and losses. Furthermore, revenues involve the following, sales, interest revenue, and service revenue. Expenses involve the cost of goods sold and non-operating expenses. It includes expenses, operating expenses (salaries, advertising, utilities, rent, etc.)
In addition to this, if a corporation’s stock is publicly traded, the earnings per share of its common stock are reported on the income statement. The basic structure of an income statement is:
Revenues – Expenses = Net Income
Adhering to GAAP (Generally Accepted Accounting Principles) revenue is recorded in a period that witnesses the sale of goods and services. Moreover, it may or may not be the same period in which the cash is received.
Tips to prepare an income statement
Format the body
Income statements have four different segments:
- The 1st segment of the income statement calculates gross profit from sales revenue and cost of goods sold.
- The 2nd segment deals with the calculation of operating income from operating expenses and gross profit.
- The 3rd segment deals with the calculation of non-operating income. This income is based on expenses and non-operating revenues.
- The 4th segment deals with the calculation of net income using all expense and revenue information.
Prepare the gross profit section
- Write “Sales revenue” below the income statement header. Mention the sales revenue for the period.
- Mention “Cost of goods sold” below “Sales revenue.” You should list the cost of goods sold in the period.
- Label the next line as “Gross profit.”
- Subtract the cost of goods sold from sales revenue.
Make the operating income sheet
- Mention every specific operating expense.
- Add every operating expense line item
- Do this to determine the total operating expenses.
- Label the next line as “operating income.”
Prepare the Non-operating Income Section
- Write down every specific non-operating revenue.
- Write down the non-operating expenses the business has.
- Deduct non-operating expenses from non-operating revenues.
Make the net-income section
the next line “Net income.”
- Add non-operating income to operating income.
- Transfer the remaining balance to the retained earnings.
Also read: A Solution to Your Troublesome Finance Assignment
Balance sheet
The balance sheet is a statement that deals with the assets and liabilities at the end of an accounting period. Moreover, it can be considered as an overall financial picture at a particular period of time. The balance sheet is divided into three parts:
- Assets
- Liabilities
- Stockholder’s equity
First Section
This is the first section of the balance sheet. In this one, we report the assets of a company. Assets include cash, inventory, building, accounts receivable, equipment, and prepaid insurance.
Next Section
The midsection is responsible for reporting the liabilities of a company. It deals with the obligations which are due to date. Most often it constitutes the word “payable.” For instance, wages payable, accounts payable, interest payable, etc.
Final Section
The final section of a balance sheet is stockholders’ equity. You can understand it as a difference between the number of liabilities and the number of assets. Moreover, the basic structure of a balance sheet is:
Assets = Liabilities + Stockholders’ Equity
Stockholder’s equity is the amount of finance provided by operations. It is the retained earning which distributed to stockholders. Plus, it is done by stockholders who reinvest through the contributed capital. Financial accounting used to be a nightmare for me but when I decided to pay someone to take my finance class, I came across this easy method of making a balance sheet. And I know for any student learning account, matching balance sheets is a tough deal to crack. I will also tell you how you can become a pro at making balance sheets. Check out the tips below, use them, and see the difference. – Aoife Murphy, Accountant, Texas
Tips for preparing a balance sheet
Understand the basic equation completely
The basic structure which stands above is the basic equation for financial accounting. You have to make sure that you understand it perfectly. Moreover, it will take your time as you will have to get into some details. Because the equation is a very simplified version of everything, everything that a real balance sheet calculates.
Calculate the assets
Assets, money, investments, and products the business owns can be converted into cash. These are what put companies in the financial positive. Moreover, a company must have assets that are more than the sum of its liabilities. This generates value in the company’s stock or equity and gives new opportunities for financing. Assets are of two types:
- Fixed assets: supplies, property, and intangible assets
- Current Assets: Cash, accounts receivable, inventory, prepaid insurance, securities.
Identify the liabilities
Liabilities are a negative part of every equation. It involves operational costs, material expenses, and debt. The lower the liabilities, the greater the value of the company. “Current Liabilities” include cash spent, as well as any debts that must be paid out within one year, while “Fixed Liabilities” refer to bills due any time after one year. Moreover, liabilities are of two types:
- Fixed liabilities: Bills that are due any time after one year. It includes shareholder’s loans, bonds payable, car loans, pension benefit obligations, etc.
- Current liabilities: The cash spent, and any debts that must be paid out within the period of a year. It includes taxes owed, wages payroll, accounts payable, unearned revenue, operating line of credit, business credit cards, etc.
Equity valuation
Owner’s Equity = Assets – Liabilities
The value of the assets minus the liabilities gives an estimation of the value of the company’s capital. Moreover, it is easy to understand that if this equation will give a negative result, then the situation is harmful to the company. Furthermore, this will hamper secured financing. Equity includes capital stock, dividends paid, retained earnings, owner’s draw, opening balance equity, etc.
The cash flow statement
This statement provides the actual cash flow into the company in and out of a company at a particular time. In contrast with the income statement which shows the net income, the cash flow statement showcases the cash from different activities. Moreover, the statement of cash flow is categorized into three parts:
- Operating activities
- Investing activities
- Financing activities
The section on operating activities describes:
- the way in which a company’s cash or cash equivalents have changed with effect on the operations.
The section on investing activities deals with:
- the amount received or spent in transactions that involve long-term assets.
The last section is about financing activities which express the following aspects:
- money spent to remove long-term liabilities, issuance of stock, or issuance of long-term debt.
Tips to prepare a cash flow statement
Gather important data and documents
- Balance sheet (statement of financial position)
- Statement of variations in equity for the current reporting period
- Statement of comprehensive income (Profit or loss statement + statement of other comprehensive income if applicable)
- Statement of cash flows for the previous reporting period
Put the change of balance sheet in the cash flow
The rationale that backs this step is that every change in the balance sheet can influence the cash flow statement. Moreover, you must check out the changes in your balance sheet and enter every number into the blank form of the cash flow statement.
Make adjustments for non-cash items
Make the statement of other comprehensive income and profit or loss statements. After this, identify numbers where the non-cash transactions can be recorded. Hence, let’s see how non-cash adjustments are as follows:
- The expense for recognition or income from recognition of various provisions.
- Change in revaluation reserves.
- Barter transactions.
- Depreciation expense.
- Interest income and expense.
- Income tax expense.
- Foreign exchange differences at the end of the period.
- Revaluation of certain assets and liabilities at the end of the period.
- Transfer the balance of net income to retained earnings.
Also read: Optimize Your Finances to Study in Canada: Enrolling in an Expensive Canadian University
The statement of retained earnings
Statement of retained earnings is the last one on the list. This one records the earnings kept by the organization or company. Plus, the dividend is paid from the earnings to shareholders. Moreover, the notes to financial statements give additional information on companies’ financial status. Furthermore, the three kinds of notes explain accounting rules used to, give more detail about a particular item on financial statements, produce the statements & supply more information regarding an item not on the statements.
Retained earnings are part of the net income which is not distributed among the shareholders. Moreover, it retains within the business for different purposes. Major ones are the growth of business and meeting debt obligations. Furthermore, it relies on the profit and loss the company bears. If the net income increases the retained earnings increase as well and vice-versa as well. Also, it is shown as a component of stockholders’ equity in the balance sheet.
Tips to prepare a statement of retained earnings
Prepare a heading for the statement of retained earnings
Your Statement of Retained Earnings must constitute a three-line header. The first line is the name of the company.
- The second line is, “Statement of Retained Earnings.”
- The last and third line is “For the Year Ended XXXXX.”
Mention the previous balance of retained earnings
The very first component on a Statement of Retained Earnings needs to be the balance of retained earnings from the previous year. This can be traced from the balance sheet of the preceding year.
Do add the net income from the income statement
The second financial statement is the statement of retained earnings itself. Plus, the income statement is the first one. You just have to add the net income from the income statement.
Additional information
Preparing the fundamental statement of retained earnings is straightforward. There are a few more details shown in an actual retained earnings statement. Moreover, this was the general outline of structuring different financial statements. By following the tips anybody can learn to prepare financial statements.
As a student of accountancy, interpreting financial statements and keeping up with the pace of the course was always an issue for me. So, I always needed a helping hand. But when in the process of finding an expert to take my online class for accountants, I came to know a lot about the use of financial accounting and statements. It developed my interest in the subject and eventually, I became a part of this field. I must say, you should take risks and work hard to get to this rewarding career. Today, we, financial accountants are high in demand and earn competitive salaries. – Antoine Dupont, Tax Accountant, London
Career Opportunities in Financial Accounting
Today, the career opportunity in financial accounting is vast inclusive of positions like auditor, tax accountant, financial accountant, controller, and financial analyst. Moreover, there are opportunities for career advancement and competitive salaries. So, if you are someone who enjoys working with numbers, solving financial problems, and analyzing financial data, then this path is exclusively for you.
Conclusion
With the help of this blog, we understood that financial accounting is the mold that sets rules for the making of financial statements. Moreover, with these guidelines, companies can easily present their standardized financial reports. So, we can say that financial accounting is significant for any company to be responsible for its performance. Furthermore, it also makes them ensures transparency in operations.
Frequently Asked Questions
| Question: 1 What is managerial accounting? Answer: 1 Managerial accounting deals with preparing detailed reports for the managers inside the company. It is also known as cost accounting. |
| Question: 2 Who uses financial accounting? Answer: 2 Majorly, public companies use financial accounting. Moreover, private or small companies may also use it. However, they often use different reporting standards. |