I have always wanted to understand and interpret the Financial Statements just for me to know the mystery behind it. My thought as at then was that it is prepared for the directors/shareholders of the company and investor, little did I know that I’m also a user. This made me to read books on basic accounting for non-accountants, YouTube videos on preparation of Financial Statements. But the more I read, the less I understood. I then concluded that accounting is not for everyone especially my type.
On receiving my course outline for my MBA program with Lagos Business School, I discovered Corporate Financial Accounting (CFA) is part of the courses required for the program. What is my own with accounting again? Did I tell them I want to be an accountant? How do I cope? These were the questions that came to my innocent mind immediately I cited the course.
However, contrary to my thoughts and conclusions on the difficulty of the course, the lecturer in charge Dr.Owolabi made it easy, engaging and captivating that I now look forward to the classes. Also, I now understood the need for manager to understand and interpret financial information companies produce for the benefits of the shareholders and investors
Financial Statements is grouped into four basis which are:
- The Statement of Financial position
- The Statement of profit or loss
- The Statement of cash flow
- Statements of change in equity and plus 1 -the notes to the account
Users and Importance of Financial Statements:
- Shareholders and Directors:
- Creditors and Suppliers
- Regulators and Tax agencies
- Investment analyst and information intermediaries
- Voters and their representatives
- Managers and employees
- Creditors and suppliers
Shareholders and Directors uses financial information to estimate company value and to form buy-sell stock strategies. Both directors and shareholders use accounting information to evaluate managerial performance. Managers similarly use the information to request an increase in compensation and managerial power from directors.
Creditors and Suppliers seek for financial information to help determine loan terms, loan amounts, interest rates, and required collateral. loan agreements often include contractual chain relations. Both creditors and suppliers use financial information to monitor and adjust their contracts and commitments with a company.
Managers and Employees demand for information on the financial condition, profitability, and prospects of their companies as well as comparative financial information on competing companies and business opportunities.
Investment analyst and information intermediaries such as financial press writers and business commentators, are interested in predicting companies’ future performance. expectations about future profitability and the ability to generate cash impact the price of securities and a company’s ability to borrow money at favorable terms.
Preparation of Financial Statements
We started this by interpreting and understanding transactions.
Transactions is any event that has a financial impact on the business and can be measured reliably. It must have an amount attached to it. E.g., the purchase of bags of flour for NGN5,000, purchase of accounting software for $4,000 for business ventures or activities.
Transaction majorly involves giving something and receiving something in return.
A statement or an account can be generated from a single transaction by using the accounting equation (Asset = Liability + Owners Equity). Also, the other statements of financial accounting are generated from multiples of transaction.
My quest for accounting knowledge has been made easy by LBS MBA program and hopefully it becomes easier as the journey unfolds. #MMBA3
Peter D. Easton,John F. Wild, Robert F. Halsey, Mary Lea McAnally. (2015). Financial Statements: Demand and Supply. In: Financial Accounting for MBAs. 6th ed. USA: Cambridge Business Publisher. pg. 22-23.