Introduction
Accounting
What is Accounting?
Referring to the Introduction to Accounting - Year 1, Accounting is the systematic process of:
- Recording
- Summarizing
- Analyzing
- Reporting financial transactions and information
Why Accounting?
The primary purpose of accounting is to provide RELEVANT and RELIABLE financial information about the economic activites of an organization to the various stakeholders.
Stakeholders include (but not limited to):
- Management (owners, directors, managers)
- Investors
- Creditors
- Regulators
- Public
Flavors of Accounting
- Bookkeeping: Recording of financial transactions
- Financial Accounting: FOR EXTERNAL USERS
- Management Accounting: FOR INTERNAL USERS
- Income Taxes Accounting
General / Financial Accounting
Process


Limits
- Historical Focus: only records past transactions
- Subjectivity: analysis relies on judgements
- No Non-Financial Information: only records financial transactions
- Lack of Forward Looking Information: only records past transactions and not future transactions
- Complexity: accounting standards are complex
- Aggregation: information is aggregated and not detailed
- Lack of Timeliness: information is not available in real-time
- Ignoring Intangibles: information only includes numbers and not intangibles
- Manipulation & Fraud: information can be manipulated and fraudulent
- Globalization Challenges: information is not standardized across the globe (GAAP vs IFRS)
Why ?
- Performance Evaluation: to evaluate the performance of the organization, how well it is doing, how profitable, how efficient, etc.
- Comparative Analysis: to compare the performance of the organization with other organizations in the same industry
- Risk Assessment: to assess the risk of the organization, how risky it is to invest, how likely it is to go bankrupt, how reliable it is, etc.
- Creditworthiness: to assess the creditworthiness of the organization, how likely it is to pay back its debts, how likely it is to default, etc.
- Strategic Planning: to plan the strategy of the organization, how to grow, how to expand, how to invest, etc.
- Investors Decisions: to help investors make decisions, whether to invest, how much to invest, etc.
- Valuation, Investment Decision, And Capital Budgeting: to help investors value the organization, how much it is worth, how much it is expected to grow, etc.
- Management Performance: to evaluate the performance of the management, how well they are doing, how well are they managing, how efficiently, etc.
- Early Warning Signs: to identify early warning signs of the organization, how likely it is to go bankrupt, how likely it is to default, etc.
- Regulatory Compliance: to comply with regulatory requirements, to comply with accounting standards, etc.
Account & Finance
Accounting = recording, summarizing and reporting the transactions.
Finance = planning, managing and controlling the resources using the accounting information.
Financial Analysis
What is Financial Analysis?
Financial Analysis is the process of evaluating the financial performance of an organization using the financial information.
It is used to assess the financial health of an organization, the financial strength, profitability, and efficiency of an organization.
Why?
- Assessing financial performance: to assess the financial performance of the organization, how well it is doing, how profitable, how efficient, etc.
- Evaluation financial health: to evaluate the financial health of the organization, how healthy it is, how strong it is, how likely it is to go bankrupt, etc.
- Identifying financial trends: to identify financial trends of the organization, how it is doing, how it is growing, how it is performing in specific periods of time, etc.
- Comparing performances: to compare the performance of the organization with other organizations in the same industry
- Supporting investment decisions: to support investment decisions, whether to invest, how much to invest, etc.
- Assisting credit decisions: to assist credit decisions, whether to lend, how much to lend, etc.
- Facilitating strategic planning: to facilitate strategic planning, how to grow, how to expand, how to invest, etc.
- Forecasting future performance: to forecast the future performance of the organization, how it is expected to grow, how it is expected to perform, etc.
- Detecting financial distress: to detect financial distress of the organization, how likely it is to go bankrupt, how likely it is to default, etc.
- Communication and reporting: to communicate and report the financial performance of the organization to the various stakeholders in a decision-making way
Types
Financial Statements
Income Statement
- Revenues: the amount of money earned from selling goods or services
- Cost: the amount of money spent to produce goods or services
- Expenses: the amount of money spent to generate revenues
It is used to calculate the NET PROFIT AFTER TAXES of an organization. (metric of profitability)
The Income Statement is done over a period of time (usually a year or quaterly).
Balance Sheet
- Assets: the resources owned by the organization
- Liabilities: the debts owed by the organization
- Equity: the amount of money invested in the organization
It is used to evaluate the position of an organization. (metric of financial strength)
The Balance Sheet is done at a specific point in time (usually at the end of the year or quaterly).
Cash Flow Statement
- Cash Flow From Operating Activities: the amount of money generated from the operations of the organization
- Cash Flow From Investing Activities: the amount of money generated from the investments of the organization
- Cash Flow From Financing Activities: the amount of money generated from the financing of the organization
It shows how changes in the balance sheet and income statement affect cash and cash equivalents. (metric of liquidity)
It is used to evaluate the liquidity of an organization. (metric of financial health)
The Cash Flow Statement is done over a period of time (usually a year or quaterly).
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