CFA: A Basic Guide

What is CFA? Cost and Financial Accounting provides a comprehensive view of how accounting contributes to an organization. An understanding of CFA helps develop financial accounting literacy skills and thus able to help you understand better the financial information companies produce for the benefit of investors and shareholders.

Cost and Financial Accounting provides top managers with the skills for using financial statements to make business decisions, to interpret and apply nonfinancial statement disclosures, such as footnotes and supplementary reports.

To interpret financial statements, we need to understand how they are prepared.

A. The 10 Key terms / learning points on the basic elements of Corporate Financial Accounting are:

1. Assets: An asset can be described as the property or legal rights to which monetary value can be attached and is expected to yield benefits.
2. Liabilities: A liability can be described as the amount owed by a business either to the proprietor or outsiders, resulting in an outflow from the business.
3. Equity: An equity can be described as the difference between assets and liabilities
4. Revenues: This can be described as the inflow a business makes from its business activities.
5. Expenses: These are the outflow a business incurs while generating revenue.
6. Gains: This can be described as the inflow a business makes from other transactions that are not regular.
7. Losses: This can be decrease in equity a business incurs from other transactions that are not regular or recurrent.
8. Comprehensive Income: This can be described as the changes in equity of a business from transactions that are contributed by the owners and / or transferred to the owners.
9. Investments by owners: This described the owners contribution to the business, leading to increased equity.
10. Distribution by owners: This described as a transfer to owners, leading to increased equity in the business or enterprise. e.g. dividends paid to shareholders.

B. The Five Financial Statements (4 + 1):

• Balance sheet (Statement of Financial Position)

The term balance sheet refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time

• Income statement (Statement of Profit and Loss)

The Statement of Profit and Loss depicts the Accomplishments Vs Efforts (during a period) of a company. When the accomplishments (revenue) are higher than efforts (expenses) the company has recorded Profit and when the efforts are higher than the accomplishments the company has recorded Loss.

• Cash Flow (Statement of Cash Flow)

The Statement of Cash Flow depicts all information of inflow and outflow of cash from a company. It shows a company’s cash management.

• Statement of Changes of Equity (Retained Earnings)

The Statement of Changes of Equity depicts the changes in Owners’ Equity of a reporting period. This shows the changes in share capital/dividends, reserves and retained earnings.

• Notes on Financial Statement

Notes to the financial statements disclose the detailed assumptions made by accountants when preparing a company’s: income statement, balance sheet, statement of changes of financial position or statement of retained earnings. The notes are essential to fully understanding these documents.

C. 5 Key Learning Points of CFA:

1. The ability to read financial statements
2. The ability to analyze financial statements
3. The ability to generate/develop financial statements based on information collated.
4. The ability to calculate ROI
5. The ability to predict future revenue

Reference:

1. https://www.investopedia.com/terms/b/balancesheet.asp
2. https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/notes-to-financial-statements#:~:text=Notes%20to%20the%20financial%20statements%20disclose%20the%20detailed%20assumptions%20made,to%20fully%20understanding%20these%20documents.

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