Financial Accounting: trying to make Financial Statements a safer place

Does Financial Accounting continue to be the true art of of black magic? Or does it serve a useful economic purpose that is invaluable to society in general?

Given the nature of this website we think you'll be hardly surprised to find out that we are the true believers - we firmly believe that advanced and basic financial accounting is vital for the business economy we live in.

If that sounds all a bit pompous then let's make this a bit more simple.

For most (if not all) companies there are many parties (sometimes called stakeholders) who are interested in how these companies have performed.

Questions they want answers to are:

  • Did the company make or lose money i.e. profit or loss?
  • Can the company continue to be in business? That is, do they have a strong balance sheet? Are their assets greater than their liabilities?
  • What is their cashflow like? Are they earning cash quicker than they are spending it?

These stakeholders need financial accountants to prepare a set of financial statements that tells them this information in a understandable way.

And that's what it's all about. Let's delve in a bit:

What are Financial Statements?

Since you're interested in following an accounting career we're hoping that you've either seen on tv or read in the newspapers when a major company announces it results.

You'll get a headline like "The Widget Bank corporation today announced it's full year results. A profit of $3.6 Gazillion which was a 300% increase over last year".

Where did the journalists get these numbers from? The Financial Statements.

And who prepared them? The financial accountants

And how did they prepare them? They prepared the statements using what are known as Generally Accepted Accounting Principles - sometimes referred to as GAAP. Or even basic accounting principles. Hello? What?

Rather than sidetrack our discussion here - we've devoted a whole page to understanding how accounting concepts and statements are put together. But what stakeholders need to know is that companies present their results on a consistent basis - that is, they are all playing under the same rules.

Who are the Stakeholders?

Ah, those pesky people who dare to ask tricky questions and want reliable information. Basically, they are defined as anyone who has direct or indirect interest in how a company performs as they can be impacted (good or bad) by that performance.

The usual suspects are the owners/investors (i.e. shareholders), creditors (those who have lent the company money - which could be banks or investors - and suppliers), the tax authorities (they don't like it when they don't get paid), financial analysts & journalists, employees/unions (do you want to work for a company that's going bust?) and other government agencies. The bigger the company the wider the stakeholder list gets.

Who is allowed to prepare financial statements?

OK, we know it's the financial accountants but not everybody can be one. You need to be trained in how to prepare them. And that's what this website is all about. Telling you which certifications you need to get to allow you be involved in Financial Accounting.

What's Difference Between Financial and Managerial Accounting

Perhaps it's the right time now to talk about the key differences.

Management Accountants do not specialise in financial statement preparation and do not have the same (if any) GAAP training that a chartered or certified practising accountant (CA & CPA's) will have.

It's not their gig which is fair enough.

This brings up what has been traditionally been seen as the difference between the the two areas. Financial = External Reporting, Managerial = Internal Reporting.

We personally think this is nonsense. Many textbooks, Wikipedia etc. still argue that Financial Accounting is for external use only and Managerial accounting is exclusively for internal use.

We say that's just plain out wrong.

When larger companies present their financial statements, there is always complementary managerial accounting analysis which provides greater levels of in depth details. And that data is used extensively by the stakeholders.

Also, the financial bean counters work closely with the business to ensure that they fully understand the statements and what's in them. The directors/senior management of the company have to put their name against them.

To say the directors don't use these them for anything other than external use seems a bit far-fetched. Of course they use to them understand - at a high level - what's happening in their business. Last time we checked the Directors/Senior Managers were internal to the company.

Summing Financial Accounting Up

So, just to recap, it's the art of preparing financial statements that are used extensively by internal and external parties to make decisions about a company.

Given the importance and difficulty of preparing them, Financial Accountants need to be appropriately qualified to carry out the job.

That means being appropriately certified.