Financial Accounting Principles: A Comprehensive Report

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Financial Accounting Principles
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Contents
Introduction.........................................................................................................................................3
A............................................................................................................................................................4
A.1.....................................................................................................................................................4
A.2.....................................................................................................................................................8
B..........................................................................................................................................................11
Client 1...........................................................................................................................................11
Client 2...........................................................................................................................................20
Client 3...........................................................................................................................................23
Client 4...........................................................................................................................................25
Client 5...........................................................................................................................................27
Conclusion..........................................................................................................................................29
References..........................................................................................................................................30
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Introduction
It is the responsibility of the management to prepare financial management so to provide
information regarding the business operations and performance of the company. The financial
statements prepared and presented should be true and fair view so as to enable the
stakeholders to be able to use for the purpose for which they were intended to. Financial
statements to be relevant and fair, Generally Accepted Accounting Principles (GAAP) and
accounting standards are needed to be adopted and followed in the presentation and
preparation of the financial statements. Preparation of financial statements involves the
recording of transactions in chronological order in a systematic manner which forms the basis
for the Double Entry System. Reconciliations procedures are required to be undertaken in
cases where the accounts do not tally such as Bank Reconciliation Statement, Suspense
Account etc. Such reconciliation procedures enable in identifying errors done in the
accounting treatment while preparing the accounts and thus enable their rectification.
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A.
A.1.
Financial Accounting keeps track of company’s financial transactions. Using standardized
guidelines, these transactions are recorded, summarized and presented in a clubbed manner
(Bushman and Smith, 2012). These statements are presented to the company’s stakeholders,
creditors on routinely basis. The stakeholders have right to question the performance of the
company on basis of financial reports. If a company’s stock is publicly traded, the financial
reports are circulated on a larger level to competitors, customers, labour organizations . The
purpose of financial accounting is not to transact the value of the company, but to provide
sustained information about the firm for others to assess by themselves.
Since, these reports are used by a lot of people in various ways, financial accounting has
certain rules commonly known as accounting standards and “Generally accepted accounting
principles” (GAAP). All the transactions are reported under these principles only. There are
two types of methods of financial accounting which are commonly followed:
 Accrual: The accounting method under which the receipts are realized on the income
statement when they are earned, rather than when they are received and payments are
recognized before the cheques are cleared is known as Accrual Accounting (Hines,
2012). It is considered to be the most standardized practice for companies.
 Cash: When the accounting is done with the immediate cash in hand, it is known as Cash
Accounting. The cash based method is very accurate as the transactions are entertained
only when the corresponding cash is received or the payment has been done (Kargin,
2013).
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The Financial Statements are elaborated as below:
 Profit and Loss A/c: As the name suggests, the profit and loss a/c delivers the profit
or loss status of the company. The period of computation of this a/c can be monthly,
quarterly, or annually. The components of income statement involve revenues, expenditures,
gains and losses. Revenue includes things like sales, service revenues and interest revenues.
Expenses envelop cost of goods sold, operating expenses (rent, utilities and salaries) and non-
operating expenses (interest expense).
 Statement of Cash Flows: The flow of cash in the company throughout the year in
terms of revenues and expenditures is reported in the Statement of Cash Flows. The flow of
cash is divided into three parts namely, operating activities, financing activities and investing
activities (Socea, 2012). The flow of cash in the operations in encountered in the operating
activities. Financing activities refer to the issuance of long-term debt, issuance of stock.
Investing activities section includes amount spent or received through long term assets.
 Statement of Financial Position: The Company’s balance sheet is the face value of
the company. The balance sheet is divided into three parts: Assets, Liabilities and
stockholders’ equity. The first section of the balance sheet is assets which include cash,
accounts receivable, prepaid insurance and inventory. The next section, which is liabilities
includes accounts payable, wages payable. The last section that is stockholders equity is the
difference between the total amount of assets and liabilities.
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The objectives of financial accounting are mentioned as below:
 Relevance: Companies report financial statements on quarterly and annual basis, which
makes the data relevant for the use of stakeholders, creditors and management.
 Reliability: The accounting information should be reliable. If the company’s reports are
not reliable, then it will be difficult for the investors to gain information they need for the
purpose of making decisions (Kothari and Lester, 2012). Reliable information is
trustworthy and not misleading.
 Consistency: As the financial reports are circulated in quarterly, half-yearly and annual
basis, it is important to maintain consistency in the reports in terms of figures. If the
accounts details are not consistent, it is highlighted in the audit reports.
 Comparability: The financial reports should be comparable. When the firm has
comparable data, then it becomes easy for the investors to make judgement about
investment opportunities (Marilena and Corina, 2012).
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Principles of Financial Accounting
To achieve the goals of the organization, to improve the company’s performance, the
company should follow the principles of financial accounting. The principles followed are
provided as below:
 Cost Principle: Every organization should record its assets, liabilities and equity at the
original cost at which they were bought or sold. There might be fluctuations in the
amount due to factors like depreciation, but this should not be reflected in the reporting
process.
 Materiality Principle: This principle states that the reports should involve data which is
realistic. If the data mentioned in reports is different from that of the transactions
documented, it will be misleading for the management (Hines, 2012).
 Time Period Principle: It is very important for the organization to report their financial
statements in the stipulated time frame. If the reports are not submitted on time, then it is
implied that the process of accounting in the firm is not proper.
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A.2.
The primary purpose of accounting is to produce accurate and reliable financial statements of
the firm. It provides information about the results of operational activities, financial activities
and cash flow of an organization. These reports are then analyzed by the shareholders and
management for comparison and taking decisions regarding investment opportunities
(Kużdowicz, 2012).
Accounting also helps in controlling the costs. With regular monitoring of the financial
reports, it is taken on notice that how much costs are being incurred in operational and
functional activities. Further discussed are few purposes of financial accounting that helps the
organization in achieving its goals:
 Decision Making: Fiscal statements help the manager and higher administration to take
key decisions regarding investment, mergers and acquisitions and other financial
activities. This enables them to take corrective measures as an when required for better
performance and achieving higher profitability (Socea, 2012).
 Investment Opportunities: With the help of financial statements, the mangers can focus
on long term investments to increase the diversified capital share of the company. If the
company witnesses rise in revenues, then the profit margin is invested respectively.
Higher profits can be used in acquiring small business firms.
 Accurate Presentation of Data: The main purpose of accounting is to present the
financial data in the most accurate comprehensive manner. As the annual report is
circulated to various parties, investors, customers, competitors a lot of new customers
can invest in the company (Jarolim and Öppinger, 2012).
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Stakeholders
People who are involved in the business activities of the firm are known as the stakeholders.
These people, either individually or in a group have invested their capital in the firm. The
performance of the company, whether good or bad directly affects the stakeholders; value
(Bushman and Smith, 2012). The stakeholders are of two types:
Internal
There are two types of internal stakeholders in the company:
1. Employees: Employees are very important stakeholders of the organization. They invest
their amount in the firm for getting returns. They are directly affected by the profits or
losses earned by the company.
2. Management: The management of the company is the second internal stakeholder of the
company. The performance of the company is reflected by the performance of the
management (Kothari and Lester, 2012).
External
There are four External Shareholders of the company
3. Shareholders: Shareholders are interested to know the fiscal statements of the company.
They are the main investors; they are keen to assess the performance of the company.
4. Government Authorities: Government Authorities want to know if the company has
followed the accounting standards while computation of the financial statements. They
want to be assured if the company has complied with all legal laws and compliance.
5. Creditors: Creditors are important stakeholders, as they want to know the liquidity and
solvency position of the company. They want to be assuring of the fact that their loans
will be paid on timely basis.
6. Customers: Customers are key stakeholders of the company. They are the promising
investors of for the organization. Higher profits of the company will bring higher returns
to them. Also they evaluate how the company will perform in long term (Marilena and
Corine, 2012).
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Conclusion
This report presents the importance of accounting for a business firm. Financial Accounting
is very crucial in terms of monitoring the firm’s performance. It presents the fiscal statements
for various purposes which in the end lead to the growth of the organization. The Income
statement and the balance sheet particularly is the report card of the organization. Various
important decisions regarding business are taken on the basis of these reports. It not just
affects the internal management of the firm, but also affects the shareholders, creditors,
competitors.
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B.
Client 1
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