Financial Accounting: Statements and Information Systems

Financial Accounting

Overview

Financial accounting is a branch of accounting that deals with the preparation and presentation of financial statements to external users. These financial statements, which include the balance sheet, income statement, and cash flow statement, provide a snapshot of a company's financial performance and position at a specific point in time. Financial accounting is governed by Generally Accepted Accounting Principles (GAAP) in the United States and International Financial Reporting Standards (IFRS) internationally.

Balance Sheet

The balance sheet, also known as the statement of financial position, provides information about a company's assets, liabilities, and equity at a specific point in time. It is structured in a specific format, with assets listed first, followed by liabilities and equity. The assets are listed in order of their liquidity, from the most liquid (current assets) to the least liquid (property, plant, and equipment).

Income Statement

The income statement, also known as the statement of comprehensive income, shows a company's revenues, expenses, and profit or loss over a specific period of time, such as a month, quarter, or year. It is organized by function, with operating activities listed first, followed by other income (and expense) and taxes. The total of all revenues and gains is subtracted from all expenses and losses to arrive at the net income for the period.

Cash Flow Statement

The cash flow statement shows a company's cash inflows and outflows from operating, investing, and financing activities during a specific period of time. It is divided into three sections: operating activities, investing activities, and financing activities. The net cash flow from operating activities is calculated by subtracting cash used in operating activities from cash generated by operating activities. The net cash flow from investing activities is calculated by adding cash provided by investing activities to cash used in investing activities. The net cash flow from financing activities is calculated by adding cash provided by financing activities to cash used in financing activities. The net cash flow from operating, investing, and financing activities is then added to or subtracted from the beginning cash balance to determine the ending cash balance.

Accounting Information Systems (AIS)

Accounting Information Systems (AIS) is the part of the information system that is responsible for providing financial and non-financial information to internal and external users. AIS are used to capture, process, store, and distribute accounting information. They assist in the calculation, analysis, and reporting of financial information, and they provide a means for users to access and understand this information.

Decision-making and Planning

Accounting information is used in decision-making, planning, and control. Managers use financial statements to evaluate a company's performance, identify trends, and make decisions. They also use accounting information to forecast future performance, evaluate investments, and determine the need for additional financing.

Conclusion

Financial accounting is a critical part of the accounting profession, providing information to external users about a company's financial performance and position. It is governed by GAAP in the United States and IFRS internationally, and it includes the preparation and presentation of financial statements such as the balance sheet, income statement, and cash flow statement. Financial accounting information is used in decision-making, planning, and control, and it is aided by Accounting Information Systems (AIS).