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The business environment has become more uncertain in recent months, to say the least. Creditors, investors, accountants and even employees are interested in knowing the growth and stability of such businesses for their individual and collective aims.
Hence, they would like to focus on the company’s current financial position. For example, creditors usually assess the capability of the business to pay interest and principal so they are naturally interested in the liquidity and solvency of the business.
Similarly, investors tend to focus more on the cash flow statement, balance sheet and income statement to help them determine the ability of the business to provide better business terms and consistent returns on their investment (ROI).
With so many stakeholders relying on the financial statements of a company, it is important that the professional accountants hold a good understanding of financial accounting and accounting standards.
It is for this reason ACCA developed the Financial Accounting (FA) paper that makes it even easier to gain professional and relevant financial accounting skills to meet the objectives of these key decision makers.
The whole syllabus relies on a really strong understanding of double entry bookkeeping, and of the accounting equation as well. Thus, professional accountants who want to master the art of preparing flawless financial statements including technical proficiency in the use of double-entry techniques and accurate interpretation of business performance should definitely take this course.
Financial accounting is the preparation of financial statements aimed at finding out results of the accounting year in the form of ‘Statement of Profit and Loss’, ‘Statement of Financial Position/ Balance Sheet’ and ‘Cash Flow Statement’. The statements of listed companies are available to the public and are also accessible to interested stakeholders, creditors, investors and external parties.
For unlisted entities, the financial statements are accessible to certain internal stakeholders, the tax authorities and other regulatory bodies of the country with some extracts being made available to certain specific future stakeholders.
In short, financial accounting statements are not just appropriate for those who are having existing business relationships but also for those who are interested in having a future collaboration with the company as they can use the available information to make informed decisions.
A common question about financial accounting is how it relates to cost accounting. While cost accounting examines the cost structure of a business for its own internal management and decision making, financial accounting focuses on a transaction which the business enters into, quantifies the financial impacts associated with it in different heads of accounts and provides additional information for understanding by external parties.
Eg. Salaries, repairs, insurance and stores etc – they have an impact on the profit earned or losses incurred by the company and these are addressed by financial accounting.
In a nutshell, it provides a ‘true and fair’ view of the business which is aimed at safeguarding the interests of various internal and external stakeholders who are connected to the business.
These accounts are prepared in compliance with accounting standards, local taxation rules, the Companies Act and other statutory requirements relevant to the country where the business operates.
Moreover, to ensure timely provision of these financial statements, financial accounting is performed regularly with a pre-specified reporting period – quarterly, half-yearly and annually. This enables easy comparison and keeps the information relevant for various stakeholders and investors who would like to know more about the business.
In a practical sense, the main objective of financial accounting is to prepare accurate financial statements that can be consumed by the public and the relevant stakeholders as well as investors.
A compelling one would usually have certain qualitative characteristics such as relevance and faithful representation.
Relevance is the capacity of the financial information to influence the decision of its users. The components of relevance are the predictive value and confirmatory value. Materiality is part of relevance. Information is considered material if its omission or misstatement could influence the economic decisions of users made on the basis of the financial statements.
Faithful representation, on the other hand, means that the actual effects of the transactions shall be properly accounted for and reported in the financial statements. The words and numbers must match what really happened in the transactions. The formula of faithful representation is completeness, neutrality and free from error.
In summary, it is important that accurate financial statements are prepared in the financial accounting process so it reflects a true and fair overview of the company’s business performance. In the preparation of such financial statements, relevance and faithful representation must be exercised together to efficiently prepare consolidated financial information.
Compliance with these would result in quality, informative and useful financial statements amidst escalating disputes, digital disruption and biased depiction of businesses. And ACCA’s Financial Accounting paper provides the knowledge necessary to do this in the best manner.