CHAPTER 1: INTRODUCTION TO FINANCIAL ACCOUNTING
1.1 USE, PREPARATION AND CONCEPTS
* Use: The information derived from financial accounting is used by managers, investors, bankers, financial analysts and accountants, helping them to learn how to use information effectively and to do their jobs better. This information is essential to accountants for the services they provide. * Preparation: to be effective users of accounting information, people need to know something about how and why the information is prepared. Accountants’ expertise is about the how and why. * Concepts: Users, accountants and accounting form a connected system. The demand for useful information shapes how financial accounting information is prepared. Tying it all together are the whys: the reasons it is used and prepared, the principles that lie behind it. The hows (preparation procedures and techniques), whys (concepts and principles) and uses (analysis and decisions) of financial accounting are all tied together.
1.2 FINANCIAL ACCOUNTING
* Accounting: a process of identifying, measuring, and communicating economic information to allow the users of that information to make informed decisions. * Accounting systems are usually described as either financial accounting systems (periodic financial statements are provided to external decision makers e.g. investors, creditors, customers), or management accounting systems (information for planning and performance reports to internal decision makers e.g. manager of an organisation). * Financial accounting measures an enterprise’s performance over time, and its position at a point in time, in whatever currency is relevant to the enterprise; from small to large businesses, and other enterprises including local or national governmental bodies, charities, churches etc. * Financial statements (financial accounting’s reports) summarises measurements of financial performance and position in standards thought to be useful for the enterprise’s evaluation. These statements include notes, which add an explanation to the numbers. * Financial performance: means generating new resources from day-to-day operations over a period of time. * Financial position: is the enterprise’s set of financial resources and obligations at a point in time. * Financial performance and position are highly related; strong financial performance (large profits) will lead to a build-up of resources. Healthy financial position facilitates performance; if one holds more resources than obligations, it gives more scope to be able to take activities that lead to better performance.
1.3 THE SOCIAL SETTING OF FINANCIAL ACCOUNTING
* Functions of financial accounting includes: helping stock market investors decide whether or not to buy, sell or hold shares of companies, help banks/lenders decide whether or not to lend, used by governments to monitor actions of enterprises and for tax purposes, providing basic financial records for day-to-day management etc. * Financial accounting for the enterprises seeks to monitor and report on financial events initiated, or happening to the enterprise. Accounting is not passive within social settings: it tells us what’s going on, but in doing so, also affects our decisions and actions, and therefore, affects what’s going on. * In the social setting, the parties interested in an enterprise’s financial accounting may have differing interests or purposes for the information e.g. they may be in competition or conflict with one another, or they may be operating internationally.
1.4 THE PEOPLE INVOLVED IN FINANCIAL ACCOUNTING
1) USERS (DECISION MAKERS)
* In financial accounting, a user is someone who makes decisions on their own, or a company’s behalf based on information from the financial statements. The nature and contents of financial statements are functions of the demand for decision information from users. If user demand is the...
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