The main target of Corporate Financial Accounting (CFA) is, the investor. This is because, an investor always faces the question of whether to invest into a given entity or not. Investors are the primary/key users of Corporate Financial information. They offer funding or investments to businesses. In return they become shareholders; this entitles them to a share depending on the ratio of their investments relative to the general company’s equity.
We can neither be overemphasize nor over-state the role of accounting in the life of a manager. In the hands of every manager, Corporate Financial Accounting is an important tool; one that is very essential to the process of decision making.
WHY IS FINANCIAL ACCOUNTING KEY FOR DECISION MAKING?
The world of a manager is the world of decision making and, these decisions must be based on facts in order, to yield the needed impact. In order to choose between the best available options, the impact of every criterion involved is measured accordingly as, whatever cannot be measured cannot be analyzed. CFA, provides this information in form of the 4+1 major financial statements.
Financial statements provide the information needed to make informed decisions. Given that, a manager needs to make helpful and profitable decisions for his/ her company, and an investor needs to evaluate returns/profitability, risk and time period involved in investing in order to make a decision of whether to invest in a given entity or not. Included in the various financial statements are various accounts e.g., assets, revenue, equity, etcetera.
MORE ON FINANCIAL STATEMENTS
Financial statements provide the information an investor needs to evaluate returns/profitability, risk and time period involved in investing in order to make a decision of whether to invest in a given entity or not. Included in the various financial statements are various accounts e.g., assets, revenue, equity, etcetera.
Following, are a list of the 4+1 accounting statements with short descriptions:
- STATEMENT OF FINANCIAL POSITION: This account statement tells us the resources an entity is operating or doing business with as well as the financing sources. This is the balance sheet and we can summarize it as the fundamental accounting/ balance sheet equation which emphasizes;
ASSETS = LIABILITIES + OWNERS’ EQUITY at a particular point in time.
- STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME: This account statement is comprises of the revenue and expense account weighed against each other; to obtain, profit or loss depending on which of the two accounts is of a greater magnitude. Another name for this account statement is, income statement, It is range statement unlike the balance sheet.
- STATEMENT OF CHANGES IN EQUITY: This statement shows by how much equity has moved or grown due to company operations and transactions. It provides details of all other changes in owners’ equity accounts resulting from transactions between the company and its owners.
- STATEMENT OF CASHFLOW: Statement of cashflow analyses cashflow from two perspectives;
- Inflow and Outflow movements
- Operating, Investing and Financing activities
- NOTES TO THE ACCOUNT: This is the plus one (+1) in the list of financial statements. It is notes to the account, that is; explanatory points which will put meat to the bones of the statements. It exists because, the other statements have to be largely condensed. Hence, this provides us further information to the items contained in the financial statements.
SOME OTHER KEY CONCEPTS IN CFA
- ENTITY: An entity is the case we are studying or investigating, to bring before the investor; in the form of financial statements, for the purpose of being investments. It is never an individual but the organization as a whole.
- REVENUE: This is what we know to be turnover. We generate turnover from the company’s sales of products or services, and this usually results in increases in owners’ equity.
- RESOURCES: These are the needed items required to carry out operations in an entity. They are funded by the two key financing sources namely; Equity and Liability.