Financial Accounting/Corporate Accounting
Content
Financial Accounting/Corporate Accounting
Financial
accounting (or financial
accountancy)
is
the
field
of accounting concerned with the summary, analysis and reporting of financial
transactions pertaining to a business.
This involves the preparation of financial statements available for public
consumption. Stockholders, suppliers, banks, employees, government agencies,
business owners, and other stakeholders are examples of people interested in
receiving such information for decision making purposes.
Financial accountancy is governed by both local and international accounting
standards.
Generally Accepted Accounting Principles (GAAP) is the standard framework of
guidelines for financial accounting used in any given jurisdiction.
It includes the standards, conventions and rules that accountants follow in
recording and summarizing and in the preparation of financial statements.
On the other hand, International Financial Reporting Standards (IFRS) is a set of
international accounting standards stating how particular types of transactions
and other events should be reported in financial statements.
IFRS are issued by the International Accounting Standards Board (IASB).
With IFRS becoming more widespread on the international scene, consistency in
financial reporting has become more prevalent between global organizations.
While financial accounting is used to prepare accounting information for people
outside the organization or not involved in the day-to-day running of the
company, management accounting provides accounting information to help
managers make decisions to manage the business.
Objectives of Financial Accounting
Financial accounting and financial reporting are often used as synonyms.
1. According to International Financial Reporting Standards, the objective of financial
reporting is:
1
To provide financial information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about providing
resources to the entity.
2. According to the European Accounting Association:
Capital maintenance is a competing objective of financial reporting.
Qualities of Financial Accounting
Financial accounting is the preparation of financial statements that can be consumed by
the public and the relevant stakeholders using either HCA or CPPA. When producing
financial statements, they must comply with the following:
Relevance: Financial accounting which is decision-specific. It must be possible
for accounting information to influence decisions. Unless this characteristic is
present, there is no point in cluttering statements.
Materiality: information is material if its omission or misstatement could influence
the economic decisions of users taken on the basis of the financial statements.
Reliability: accounting must be free from significant error or bias. It should be
capable to be relied upon by managers. Often information that is highly relevant isn’t
very reliable, and vice versa.
Understandability: accounting reports should be expressed as clearly as
possible and should be understood by those at whom the information is aimed.
Comparability: financial reports from different periods should be comparable
with one another in order to derive meaningful conclusions about the trends in an
entity’s financial performance and position over time. Comparability can be ensured
by applying the same accounting policies over time.
Three Components of Financial Statements:
Statement of Cash Flows
The Statement of Cash Flows considers the inputs and outputs in concrete cash within
a stated period. The general template of a cash flow statement is as
follows: Cash Inflow - Cash Outflow + Opening Balance = Closing Balance
The statement of cash flows explains the change in a company's cash (and cash
equivalents) during the time interval indicated in the heading of the statement. The
change is divided into three parts: (1) operating activities, (2) investing activities, and (3)
financing activities.
2
The operating activities section explains how a company's cash (and cash equivalents)
have changed due to operations. Investing activities refer to amounts spent or received
in transactions involving long-term assets. The financing activities section reports such
things as cash received through the issuance of long-term debt, the issuance of stock,
or money spent to retire long-term liabilities.
Profit and Loss Statement (also called Statement of Comprehensive
Income)
In case of service organizations they are called as profit & loss a/c as income
statement.
The profit or loss is determined by:
Sales (revenue) – Cost of Sales – total expenses + total income – tax paid = profit/loss
If there's a negative balance, it's a loss
if there's a positive balance, it's a profit
Statement of Financial Condition (also called Balance Sheet)
The balance sheet is the statement showing assets & liabilities. As per the proforma on
its right it shows assets and on its left side it shows liabilities. It helps know the status of
a company. The difference between current assets and current liabilities is called
working capital. The assets and liabilities are mainly divided into 2 types:
1. fixed assets and
2. current assets
The liabilities are
1. long term liabilities and
2. Short term liabilities or current liabilities.
The statements assist detailed study and analysis in each segment. For suppose in
case of if you analyze the income or profit and loss statement that means you analyze
the real meaning to how much earned or sustained loss when compare to last financial
year to this year.
3
Statement of Stockholders' Equity
The statement of stockholders' (or shareholders') equity lists the changes in
stockholders' equity for the same period as the income statement and the cash flow
statement. The changes will include items such as net income, other comprehensive
income, dividends, the repurchase of common stock, and the exercise of stock options.
Financial Accounting vs Cost Accounting
1. Financial accounting aims at finding out results of accounting year in the form of
Profit and Loss Account and Balance Sheet. Cost Accounting aims at computing
cost of production/service in a scientific manner and facilitate cost control and
cost reduction.
2. Financial accounting reports the results and position of business to government,
creditors, investors, and external parties.
3. Cost Accounting is an internal reporting system for an organization’s own
management for decision making.
4. In financial accounting, cost classification based on type of transactions, e.g.
salaries, repairs, insurance, stores etc. In cost accounting, classification is
basically on the basis of functions, activities, products, process and on internal
planning and control and information needs of the organization.
5. Financial accounting aims at presenting ‘true and fair’ view of transactions, profit
and loss for a period and Statement of financial position (Balance Sheet) on a
given date. It aims at computing ‘true and fair’ view of the cost of
production/services offered by the firm.
Financial Reporting
Financial reporting is a broader concept than financial statements. In addition to the
financial statements, financial reporting includes the company's annual report to
stockholders, its annual report to the Securities and Exchange Commission (Form 10K), its proxy statement, and other financial information reported by the company.
4
Corporate Accounting
Corporate Accounting is a special branch of accounting which deals with the
accounting for companies, preparation of their final accounts and cash flow
statements, analysis and interpretation of companies’ financial results and
accounting for specific events like amalgamation, absorption, preparation of
consolidated balance sheets.
A public company usually refers to a company that is permitted to offer its
registered securities (stock, bonds, etc.) for sale to the general public, typically
through a stock exchange, but also may include companies whose stock is
traded over the counter (OTC) via market makers who use non-exchange
quotation services such as the OTCBB and the Pink Sheets.
The term "public company" may also refer to a government-owned corporation.
This meaning of a "public company" comes from the tradition of public ownership
of assets and interests by and for the people as a whole (public ownership), and
is the less-common meaning in the United States.
Advantages It is able to raise funds and capital through the sale of its securities.
This is the reason why public corporations are so important: prior to their
existence, it was very difficult to obtain large amounts of capital for private
enterprises.
In addition to being able to easily raise capital, public companies may issue their
securities as compensation for those that provide services to the company, such
as their directors, officers, and employees.
PRIVATE COMPANY:
The term privately held company refers to the ownership of a business company
in two different ways: first, referring to ownership by non-governmental
organizations; and second, referring to ownership of the company's stock by a
relatively small number of holders who do not trade the stock publicly on the
stock market.
5
Because of these two different meanings, the use of the term should normally be
avoided unless the context makes clear which definition is intended.
Less ambiguous terms for a privately held company are unquoted company and
unlisted company.
Though less visible than their publicly traded counterparts, private companies
have a major importance in the world's economy.
In 2005, the 339 companies on Forbes' survey of closely held U.S. businesses
sold a trillion dollars' worth of goods and services and employed 4 million people.
In 2004, the Forbes' count of privately held U.S. businesses with at least $1
billion in revenue was only 305.[1] Koch Industries, Bechtel, Cargill, Chrysler,
PricewaterhouseCoopers, Flying J, Ernst & Young, Publix, and Mars are among
the largest privately held companies in the United States. IKEA, Victorinox, and
Bosch are examples of Europe's largest privately held companies.
There has been a general confusion among corporate managers about whether
to have the status of their company as private or public.
Well, it basically depends on the requirement it needs to be.
Notably, many companies prefer it to be private considering the kind of privileges
they enjoy being private.
Here’s a brief list of concessions and privileges which favor formation of private
limited companies: Privileges: - Limited liability, - Simple and easy formation, Immediate commencement of business upon incorporation, - Liberal payment of
remuneration and loans to directors without any restrictions, - Easier intercorporate loans - Lesser disclosure requirements - Tremendous ease in
operation - Two directors are enough - Two Shareholders are adequate - Need
not declare dividend - Listing of shares not mandatory - Directors need not hold
qualification shares These continue to be the dominating factors for carrying on
trade and industry through the medium of private limited companies.
Limitations: Nevertheless, there are limitations too. Under the Companies Act, a
private limited company is: - prohibited to issue any invitation to the public to
subscribe to any shares or in debentures of the company - to limit the number of
its members to 50 - to restrict the right of its members to transfer shares.
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7
Financial
accounting (or financial
accountancy)
is
the
field
of accounting concerned with the summary, analysis and reporting of financial
transactions pertaining to a business.
This involves the preparation of financial statements available for public
consumption. Stockholders, suppliers, banks, employees, government agencies,
business owners, and other stakeholders are examples of people interested in
receiving such information for decision making purposes.
Financial accountancy is governed by both local and international accounting
standards.
Generally Accepted Accounting Principles (GAAP) is the standard framework of
guidelines for financial accounting used in any given jurisdiction.
It includes the standards, conventions and rules that accountants follow in
recording and summarizing and in the preparation of financial statements.
On the other hand, International Financial Reporting Standards (IFRS) is a set of
international accounting standards stating how particular types of transactions
and other events should be reported in financial statements.
IFRS are issued by the International Accounting Standards Board (IASB).
With IFRS becoming more widespread on the international scene, consistency in
financial reporting has become more prevalent between global organizations.
While financial accounting is used to prepare accounting information for people
outside the organization or not involved in the day-to-day running of the
company, management accounting provides accounting information to help
managers make decisions to manage the business.
Objectives of Financial Accounting
Financial accounting and financial reporting are often used as synonyms.
1. According to International Financial Reporting Standards, the objective of financial
reporting is:
1
To provide financial information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about providing
resources to the entity.
2. According to the European Accounting Association:
Capital maintenance is a competing objective of financial reporting.
Qualities of Financial Accounting
Financial accounting is the preparation of financial statements that can be consumed by
the public and the relevant stakeholders using either HCA or CPPA. When producing
financial statements, they must comply with the following:
Relevance: Financial accounting which is decision-specific. It must be possible
for accounting information to influence decisions. Unless this characteristic is
present, there is no point in cluttering statements.
Materiality: information is material if its omission or misstatement could influence
the economic decisions of users taken on the basis of the financial statements.
Reliability: accounting must be free from significant error or bias. It should be
capable to be relied upon by managers. Often information that is highly relevant isn’t
very reliable, and vice versa.
Understandability: accounting reports should be expressed as clearly as
possible and should be understood by those at whom the information is aimed.
Comparability: financial reports from different periods should be comparable
with one another in order to derive meaningful conclusions about the trends in an
entity’s financial performance and position over time. Comparability can be ensured
by applying the same accounting policies over time.
Three Components of Financial Statements:
Statement of Cash Flows
The Statement of Cash Flows considers the inputs and outputs in concrete cash within
a stated period. The general template of a cash flow statement is as
follows: Cash Inflow - Cash Outflow + Opening Balance = Closing Balance
The statement of cash flows explains the change in a company's cash (and cash
equivalents) during the time interval indicated in the heading of the statement. The
change is divided into three parts: (1) operating activities, (2) investing activities, and (3)
financing activities.
2
The operating activities section explains how a company's cash (and cash equivalents)
have changed due to operations. Investing activities refer to amounts spent or received
in transactions involving long-term assets. The financing activities section reports such
things as cash received through the issuance of long-term debt, the issuance of stock,
or money spent to retire long-term liabilities.
Profit and Loss Statement (also called Statement of Comprehensive
Income)
In case of service organizations they are called as profit & loss a/c as income
statement.
The profit or loss is determined by:
Sales (revenue) – Cost of Sales – total expenses + total income – tax paid = profit/loss
If there's a negative balance, it's a loss
if there's a positive balance, it's a profit
Statement of Financial Condition (also called Balance Sheet)
The balance sheet is the statement showing assets & liabilities. As per the proforma on
its right it shows assets and on its left side it shows liabilities. It helps know the status of
a company. The difference between current assets and current liabilities is called
working capital. The assets and liabilities are mainly divided into 2 types:
1. fixed assets and
2. current assets
The liabilities are
1. long term liabilities and
2. Short term liabilities or current liabilities.
The statements assist detailed study and analysis in each segment. For suppose in
case of if you analyze the income or profit and loss statement that means you analyze
the real meaning to how much earned or sustained loss when compare to last financial
year to this year.
3
Statement of Stockholders' Equity
The statement of stockholders' (or shareholders') equity lists the changes in
stockholders' equity for the same period as the income statement and the cash flow
statement. The changes will include items such as net income, other comprehensive
income, dividends, the repurchase of common stock, and the exercise of stock options.
Financial Accounting vs Cost Accounting
1. Financial accounting aims at finding out results of accounting year in the form of
Profit and Loss Account and Balance Sheet. Cost Accounting aims at computing
cost of production/service in a scientific manner and facilitate cost control and
cost reduction.
2. Financial accounting reports the results and position of business to government,
creditors, investors, and external parties.
3. Cost Accounting is an internal reporting system for an organization’s own
management for decision making.
4. In financial accounting, cost classification based on type of transactions, e.g.
salaries, repairs, insurance, stores etc. In cost accounting, classification is
basically on the basis of functions, activities, products, process and on internal
planning and control and information needs of the organization.
5. Financial accounting aims at presenting ‘true and fair’ view of transactions, profit
and loss for a period and Statement of financial position (Balance Sheet) on a
given date. It aims at computing ‘true and fair’ view of the cost of
production/services offered by the firm.
Financial Reporting
Financial reporting is a broader concept than financial statements. In addition to the
financial statements, financial reporting includes the company's annual report to
stockholders, its annual report to the Securities and Exchange Commission (Form 10K), its proxy statement, and other financial information reported by the company.
4
Corporate Accounting
Corporate Accounting is a special branch of accounting which deals with the
accounting for companies, preparation of their final accounts and cash flow
statements, analysis and interpretation of companies’ financial results and
accounting for specific events like amalgamation, absorption, preparation of
consolidated balance sheets.
A public company usually refers to a company that is permitted to offer its
registered securities (stock, bonds, etc.) for sale to the general public, typically
through a stock exchange, but also may include companies whose stock is
traded over the counter (OTC) via market makers who use non-exchange
quotation services such as the OTCBB and the Pink Sheets.
The term "public company" may also refer to a government-owned corporation.
This meaning of a "public company" comes from the tradition of public ownership
of assets and interests by and for the people as a whole (public ownership), and
is the less-common meaning in the United States.
Advantages It is able to raise funds and capital through the sale of its securities.
This is the reason why public corporations are so important: prior to their
existence, it was very difficult to obtain large amounts of capital for private
enterprises.
In addition to being able to easily raise capital, public companies may issue their
securities as compensation for those that provide services to the company, such
as their directors, officers, and employees.
PRIVATE COMPANY:
The term privately held company refers to the ownership of a business company
in two different ways: first, referring to ownership by non-governmental
organizations; and second, referring to ownership of the company's stock by a
relatively small number of holders who do not trade the stock publicly on the
stock market.
5
Because of these two different meanings, the use of the term should normally be
avoided unless the context makes clear which definition is intended.
Less ambiguous terms for a privately held company are unquoted company and
unlisted company.
Though less visible than their publicly traded counterparts, private companies
have a major importance in the world's economy.
In 2005, the 339 companies on Forbes' survey of closely held U.S. businesses
sold a trillion dollars' worth of goods and services and employed 4 million people.
In 2004, the Forbes' count of privately held U.S. businesses with at least $1
billion in revenue was only 305.[1] Koch Industries, Bechtel, Cargill, Chrysler,
PricewaterhouseCoopers, Flying J, Ernst & Young, Publix, and Mars are among
the largest privately held companies in the United States. IKEA, Victorinox, and
Bosch are examples of Europe's largest privately held companies.
There has been a general confusion among corporate managers about whether
to have the status of their company as private or public.
Well, it basically depends on the requirement it needs to be.
Notably, many companies prefer it to be private considering the kind of privileges
they enjoy being private.
Here’s a brief list of concessions and privileges which favor formation of private
limited companies: Privileges: - Limited liability, - Simple and easy formation, Immediate commencement of business upon incorporation, - Liberal payment of
remuneration and loans to directors without any restrictions, - Easier intercorporate loans - Lesser disclosure requirements - Tremendous ease in
operation - Two directors are enough - Two Shareholders are adequate - Need
not declare dividend - Listing of shares not mandatory - Directors need not hold
qualification shares These continue to be the dominating factors for carrying on
trade and industry through the medium of private limited companies.
Limitations: Nevertheless, there are limitations too. Under the Companies Act, a
private limited company is: - prohibited to issue any invitation to the public to
subscribe to any shares or in debentures of the company - to limit the number of
its members to 50 - to restrict the right of its members to transfer shares.
6
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