Introduction to corporate financial accounting:
Corporate financial accounting is one of the core courses of the E-MBA programme. The course objective is to enable managers read and understand financial statements. This information is then used for decision-making. Financial information provided unique insights into the past, present and future states of different companies. Financial information in the form of financial statements contain information about the past and present performance of a company or entity. This information is then used to plan for the future activities of the company.
Key issues in CFA
Current financial statements highlight the present position of the company in terms of its revenues, expenses, assets, liabilities and owner’s equity. Based on the insights derived from its current financial statements, the company is able to make the necessary changes in its best interest.
Users of financial information
There are several users of financial information. These users can be classified as internal or external users of financial information. Internal users of financial information include the company management. Financial information help companies to evaluate previous performance. It also enables companies to plan for the future
External users of financial information include potential investors and investment analystse. Others include suppliers, creditors.
4+ 1 Financial statements
During the course of the programme, we learnt that there are four major finacial statements. These four financial statements include:
The statement of financial position ( balance sheet)
The statement of profit or loss and other considerable income (income statement)
The statement of cash flow and
The statement of change in equity
In addition to the four financial statements are notes to the financial statements.
The notes to the financial statements are not a separate financial statement. Rather it is a document that contains detailed explanation of the financial statements. Consequently, we have four plus one financial statements (including notes to the financial statements).
Brief explanation of the financial statements
Let’s talk a bit about the different financial statements and their functions
A) The statement of financial position (balance sheet): This financial statement details how the assets of a company are financed. Assets refer to all the structures a company uses to perform its core operations.
This brings us to the fundamental accounting equation stated as follows:
Assets = Liability + owner’s equity
The assets of a company can be funded through two main ways: owner financing and non-owner financing.
1. Owner financing: Through owner financing, a company’s assets are acquired using capital contributed by the owner of the company and its share holders.
2. Non-owner financing: A company can acquire its assets through non-owner financing in form of short-term and long-term borrowings.
A key feature of the statement of financial position is that the left side of the accounts (assets) must be equal to the left side (liabilities and owner’s equity).
B) The statement of profit or loss and other considerable income (income statement): This financial statement contains information about the company’s revenue, expenses and the net income or profit. The net income of the company may be paid out and shared among the owners of the company as dividend. Alternatively, the net profit may be retained by the business and used to expand its operations.
C) Statement of cash flows: The statement of cash flows provided details about the movement of cash in and out of the company within a specified time frame. Details of the operating, financing and investing cash flow are contained in this financial statement.
D) Statement of change in equity: This financial statement provides information about the increase or decrease in shareholder’s equity over a period of time. It also details the payment of dividends to shareholders as well as the amount of the net profit which is reinvested in the company’s operations.
Analysing financial statements will enable managers evaluate the previous performance of the company. It will allow managers evaluate the current company operations. It will also provide strategic direction for the future of the company.
The takeaway
Taking the CFA course has been a deeply rewarding experience. I am now able to read and understand financial statements. I am also able to use this information to guide my investment, financing and operating decisions as an individual and within my organisation as a whole. #EMBA 27
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