financial accounting 1

This is to help you solve financial accounting problems.

What is financial accounting?

Accounting is the collection, recording, analysing,summarising and the communication of accounting information to relevant users.

Objectives

1.To determine whether the organisation is making a profit or a loss

2.Helps determine the financial position of an organisation

3.Helps in decision making

4.Helps identify areas of wastage

Users of financial information.

i) Owners: They have invested in the business and examples of such owners includesole traders, partners (partnerships) and shareholders (company). They would like tohave information on the financial performance, financial position and changes infinancial position. This information will enable them to assess how the managers ofthe business are performing whether the business is profitable or not and whether tomake drawings or put in additional capital.

ii. Customers: Customers rely on the business for goods and services. They would liketo know how the business is performing and its financial position. This informationwould enable them to assess whether they can rely on the firm for future supplies.

iii. Managers: The managers are involved in the day-to-day activities of the business.They would like to have information on the financial position, performance andchanges in financial position so as to determine whether the business is operating asper the plans. In case the plan is not achieved then the managers come up withappropriate measures (controls) to ensure that the set plans are met.

iv. Lenders: Lenders are long term providers of capital to the firm. They have providedloans and others sources of capital to the business. Such lenders include banks andother financial institutions. They would like to have information on the financialperformance and position of the business to assess whether the business is profitableenough to pay the interest on loans and whether it has enough resources to pay backthe principal amount when it is due.

v. Government and its agencies: The Government is interested in the financialperformance of the business to be able to assess the tax to be collected in the casethere are any profits made by the business. The other government agencies areinterested with the financial position and performance of the business to be able tocome with National Statistics. This statistics measure the average performance of theeconomy.

vi. Financial Analyst and Advisors: Financial analyst and advisors interpret the financialinformation. Examples include stockbrokers who advise investors on shares to buy inthe stock market and other professional consultants like accountants. They areinterested with the financial position and performance of the firm so that they canadvise their clients on how much is the value their investment i.e. whether it isprofitable or not and what is the value. Others advisors would include the press whowill then pass the information to other relevant users.

vii. Employees: They work for the business/entity. They would like to have informationon the financial position and performance so as to make decisions on their terms ofemployment. This information would be important as they can use it to negotiate forbetter terms including salaries, training and other benefits.They can also use it to assess whether the firm is financially sound and thereforetheir jobs are secure.

viii. Members of the Public: Institutions and other welfare associations and groupsrepresent the public. They are interested with the financial performance of the firm.This information will be important for them to assess how socially responsible is thefirm. This responsibility is in form the employment opportunities the firm offers,charitable activities and the effect of firm’s activities on the environment.

ix. Suppliers They supply goods or services to the firm. The supplies are either for cashor credit. The suppliers would like to have information on the financial performanceand position so as to assess whether the business would be able to pay up for thegoods and services provided as and when the payment falls due.