Accounting provides informational access to a company's financial condition for three broad interest groups. First, it gives the company's management the information to evaluate financial performance over a previous period of time, and to make decisions regarding the future. Second, it informs the general public, and in particular those who are interested in buying its stock, about the financial position of the company. Third, accounting provides reports for the tax and regulatory departments' of the government. In general, accounting information can be classified into two main categories: financial accounting (or public
information) and managerial accounting (or private information).
The latter deals with cost and profit relationships, efficiency and productivity, planning and control, pricing decisions, budgeting, etc. Generally this information is not spread outside the company.
Financial accounting prepares and publishes a set of financial statements in a report at the end of the fiscal year. These statements include the following items: 1) the balance sheet, 2) the statement of cash flows, 3) the income statement, 4) the statement of retained earnings.
Information relating to the financial position of a company, mainly about assets and liabilities, is presented in a balance sheet. The statement of cash flows shows the changes in the company's financial position and provides information which is not available in either an income statement or a balance sheet. Thus, the statement of cash flows represents the sources and the uses of the company's funds for operating activities and applications of working capital. If the company couldn't generate sufficient cash to finance its activities, it would be necessary to borrow money and it would be shown in the statement.
Another financial statement disclosing the results of the company's activity is known as the income and expense statement. Prepared for a defined time interval, this statement summarizes the company's revenues, expenses, gains and losses and shows whether a company has made a profit within the period. If the total expenses exceeded the total revenues during the period, the difference would be the net loss of the company. Revenues are transactions that represent the inflow of assets as a result of operations - that is, the assets received from selling goods and providing services. Expenses are transactions involving the outflow of assets, such as wages, salaries, rent, interest and taxes. In addition to disclosing revenues and expenses, the income statement also lists gains and losses from other kinds of transactions such as the sale of plant assets or the payments of long-term liabilities.
The income statement excludes the amount of assets withdrawn by the owners, that is, dividends. The separate statement of retained earnings and stockholder's equity shows investors what has happened to their ownership in the company, how earnings and new stock issuance have increased its value, and what dividends were paid.
Each of these reports contains figures for previous years and for the current period, allowing to compare present and past company performance. Being prepared for the use of management, the financial statements contain neither debit nor credit columns. But they have additional data about the particular accounting method used, as well as explanations about the most important events within the previous year.
Ex. 1 Match upnumbers and letters.
1. The balance sheet represents
2. The statement of cash flows provides the information
3. The income statement summarizes the data
4. The statement of retained earnings discloses the information about
5. Financial accounting includes the information
6. Managerial accounting deals with
a. about a company's revenues, expenses, gains and losses.
b. relating to profitability of the company and its financial position.
c. the main accounting equation.
d. planning, control, budgeting and pricing decisions.
e. stockholders' equity and dividends.
f. about the changes in the financial structure of the company.
Ex. 2 Answer the following questions.
1. Who is interested in accounting information?
2. What is the difference between financial and managerial accounting?
3. What financial statements are included in an annual report and when
are they published?
4. What information can stockholders get from the balance sheet?
5. Why is it important to prepare the statement of a firm's cash flows?
6. What kind of information is represented in the income statement?
7. How can revenues and expenses be defined?
8. What statement shows the amount of a stockholder's dividends?
9. Why is it necessary to prepare additional reports?
10. What statement contains debit and credit columns?
Ex. 3 Comment on the following.
1. In what financial figures and statements the following groups of people are more interested: a) stockholders, b) managers, c) creditors,
d) the company's employees, e) competitors, f) fiscal officials.
2. Why is it necessary to develop similar accounting systems in different countries?
Ex. 4 Summarize the content of the text.