Understanding Financial Statements and Accounting Principles

Running head: ACCOUNTING
Accounting
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1ACCOUNTING
Executive summary
Purpose of the assignment is to learn about different items included in the financial statements of
any entity. The assignment was great way for providing real world experience in the classroom
environment. In this particular assignment I have learnt how to read the financial statement and
obtaining better understanding regarding various financial statements like income statements and
balance sheet and various items included in those statements like liabilities, long lived tangible
as well as intangible assets and shareholder’s equity and cash flows. I have further gathered
knowledge regarding managerial accounting, cost concepts, relevant costs, budgeting and cost
volume profit analysis. Skills required for completing the assignment was the basic knowledge of
accounting, ability to understand the financial statement ability to depict what was learnt by me
and skills of critical thinking. Difficulty I faced while competing the assignment was explaining
the evidence those I found. Further, the assignment required lot of writing and was time
consuming.
The assignment is relevant for my intended career as in future I expect to have the career in
accounts and finance. I found the assignment interesting as it includes financial and managerial
accounting. Personally I enjoy financial and managerial accounting and planning to become
either financial accountant or managerial accountant. However, the assignment challenged my
abilities and skills in accounting. I had tough time in understanding the financial statements and
different cost concepts of managerial accounting. However, in overall aspect I have enjoyed the
assignment as it felt more like real world project and I felt that I have learnt lot from the
assignment that will assist me in future for my accounting career. Further, I developed the skills
for my accounting knowledge that will assist me in analysing the business to see whether the
investment is worth for. It will further enable to explain the same to any other person with or
without the accounting knowledge regarding my findings.

2ACCOUNTING
1. Business decision and financial accounting
Financial accounting is the specialized branch for accounting that enables the business in
keeping track of all the financial transactions. As per my understanding, it is the procedure where
the entity reports and records all financial data involved in the business operations. Accounting
data is reported by the entity on series of the financial statements that includes cash flow, income
statement and balance sheet.
Income statement that is also known as profit and loss statement covers the particular
time period and represent net income of the entity for the particular period after deducting all the
expenses from revenues. Balance sheet represents assets, liabilities and shareholder’s equity
where shareholders equity is the amount of assets reduced by the amount of liabilities. Cash flow
statement represents actual inflow and outflow of the cash and includes cash from operations,
investing and financing activities.
Apart from these statements another important statement that I came across is the
retained earnings statement that represents the details regarding payment of dividend. Further, I
have found that series of accounting principles are there those are adhered by the entity in the
process of financial accounting. I have adapted the knowledge that there are 3 major areas where
the financial accounting assists in taking decisions, these are – (i) it offers the investors with the
baseline for analysis and comparison for financial health of the entity (ii) it assists the creditor in
assessing the liquidity, creditworthiness and solvency (iii) it helps in taking decisions regarding
resource allocation.
Further, providing the up-to-date and steady financial reporting the business is able
making appropriate decisions regarding cost reductions, increasing the sales, increasing
profitability, purchasing new capital assets and finding best source for the finance and its
duration. Apart from that the managers as well as owners can make the informed choices
regarding allocation of human resources, renting or purchasing certain equipment those are used
for the purpose of producing services or goods and taking decisions regarding continuance or
discontinuance of certain business activities.

3ACCOUNTING
Hence, I can make out from the above that the financial accounting is the way for the
business in keeping track for the operations and providing snapshots for financial health. Though
providing data in various statements including cash flow, income statement and balance sheet the
entity may provide the lenders and investors with more power in the decision making procedure.
2. Balance sheet
Balance sheet is 1 of the 3 fundamental financial statements and is considered as key to
accounting as well as financial modeling. Balance sheet represents the total assets, liabilities and
shareholder’s equity. As stated by Stice & Stice, (2014), under Intermediate Accounting
elements of balance sheet includes (i) Measurement and identification of the liabilities as well as
assets those are fundamental to the accounting practices (ii) Liabilities and the assets are
generally segregated into non-current and current (iii) Current items are expected to be paid or
used within 1 year whereas the non-current items are expected to be paid or used beyond 1 year
(iv) It presents the listing of organization’s liabilities and assets at certain point of the time (v)
Difference among the assets and liabilities is known as the equity (vi) It is designed through
using the basis accounting equation as “Assets = Liabilities + shareholder’s equity”
From the article I have learnt that balance sheet is the snapshot that represents the entity’s
financial position at particular point of time. Assets are recorded for the item from where
estimated future economic benefit will be obtained or will be controlled by the entity as a result
of the past events or transactions. Regarding liability I have learnt that it is estimated future
sacrifice for the economic benefit that is arising from the present obligation to transfer the assets
or provide the services in future owing to past events or transactions.
I further learnt that the equity is residual interest in assets of the organization that remains
even after deducting the assets and under business, equity is ownership interest. The article
further given me the idea that balance sheet is used along with other major financial statements
to conduct the fundamental analysis or to compute the financial ratios.
Apart from the above, I have learnt that amount of total liabilities can be compared with
the amount of total equity that gives the idea regarding the leverage of the company. In other
words, it provides useful information to the creditors and lenders those are interested in knowing
whether extension of the additional credit will be resulted in good debt or bad debt.