Financial Accounting Paper
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The subject entails the practice of preparing financial reports for the purposes of management decisions. In every business undertaking, decision making is important. This would depend on the data and information available to support whatever deliberations are taken, therefore, the need to maintain the records (Berezin 20). An accounting system on the other hand is a set of methods of accounting. Accounting systems contain procedures and measures of control established with an aim to collect and maintain financial data for management decisions. Reasons for maintaining such a system include easy retrieval when required. Additionally, future reference or evidence in case of need for confirmation or some proof presents the other vale of financial accounting. It is also important to keep the system since it is useful in computing cash flows within the organization or concerning some business enterprise. This is important since the concept of time value of money must be considered.
The basic structure of Assets, Liabilities and Stockholders’ equity
Assets have been defined as economic resources. They are tangible or intangible items that give value which is maintained for a positive economic value. Simply noted as holdings that can be converted into cash, assets are mainly classified as tangible and intangible assets. Tangible are those that are physical in nature and include current and fixed assets. Fixed assets mainly last for over a one-year period. They consist of items such as land, buildings and equipment. Current assets include inventory and usually last for a period of less than one year before they are converted into cash. Intangible assets are resources and rights of interests that are of nonphysical nature such as patents, goodwill and financial assets like bonds, stocks and accounts receivable.
Liabilities, in regard to financial accounting, are defined as rights and interests that are of past undertakings accruing to the firm or business enterprise that are owed to other persons. They are paid for. Hence, they constitute an expense to the firm. Liabilities are also described as having the following characteristics, any type of borrowing by the business that is payable and some duty that would involve any transfer of assets from the business.
Stockholders’ equity is the members’ contribution to a business. It is arrived at by subtracting all the liabilities from the assets owned. The residual that remains once all the liabilities have been paid for constitutes the stockholders’ equity. When liabilities are higher than assets of a firm, the stockholders’ equity is negative implying a loss to the stockholders. If the liabilities are less than the assets, the stockholders’ equity is positive showing profits to the firm. This would later on be converted into dividends to the shareholders.
These are formal records showing the financial activities of a business or persons. They consist of relevant financial data and information that is presented in a structured manner and in such a way that is easily understood by the users of such information (Steven 12-28). They often show a statement of financial position, a statement of comprehensive income, a statement of changes in equity and a statement of cash flows. This kind of information is basically used by the management for various decisions.
A balance sheet is a statement that shows a financial position over a period of time, usually one year. It has information about the assets, liabilities and owners’ equity of a business. An income statement is a document depicting revenues less expenses for a given period. Statement of owners’ equity explains the changes in retained earnings. It, therefore, shows a residual value that is due to owners or shareholders. A cash flow statement represents an analysis of all transactions of a business.
Effects of revenues, expenses and dividends on the financial statements
Revenues are earnings that accrue to a person or persons. When they are generated, they improve the profits to a business and, therefore, the overall position of the business (Mortimer 19). They improve the financial statements like the statement of income or the profit and loss account.
Expenses are costs that are incurred by the business. They reduce the income levels to the business and, therefore, worsen the position of the business. Consequently, their effect on the financial statements is that they worsen the welfare of the business.
Dividends are earnings which are paid out to the shareholders once the business has earned profits. They are paid out, implying that they are like an expense. They, hence, weaken financial statements because funds are taken from the business and paid out to the shareholders thereby reducing funds for the business’s operations such as expansion.
Net income and cash flows
Net income is the amount that is arrived at after subtracting all expenses from the revenues earned by a business. Therefore, it is income that is not subject to any liabilities. Cash flows are streams upon which money is received or expensed. It represents movements of funds either into or out of the business. It includes all expenses and revenues accruing to a firm.
Business is the carrying out of activities with an aim of making a profit. To arrive at that, various operations are undertaken. In so doing, funds are incurred and revenues earned. Financial accounting provides the knowledge of computing and analyzing cash flows so as to determine whether profit is being made or losses are being incurred. Therefore, this topic provides the relevance of accounts as crucial towards the running and management of a business enterprise.
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