Financial Accounting for MBA

It’s a necessity for MBA students to be skilled in the usage of financial statements in decision-making processes in their business places. These skills cover functional areas such as budgeting, profitability measuring, forecasting, benchmarking, and business valuation relevant to the business decision-making process. To this end, it has been mandated at Lagos Business School (LBS) that all MBA students must undertake a course on Corporate Financial Accounting (CFA) to enhance the skills needed in making managerial inferences and decisions. Today we will be reflecting on Financial Accounting for MBA our first topic in the CFA class.

Users and Suppliers of Financial Statement Information

The financial statements present the five main classifications of financial data which includes: revenues, expenses, assets, liabilities, and equity. The profitability equation measures the difference between revenue and expenses giving us profit or loss. Revenues and expenses are accounted for and reported on the income statement.

Financial accounting information serves many purposes. Including:

• Operating, Investing, and Financing decisions are made through financial information.
• It aids the decision of whether to buy or sell stock.
• Regulators use accounting information to enact social and economic policies.
• Tax Authorities use financial information to measure a company’s tax liability.
• Educational Institution requires financial information for research purposes.

The suppliers of financial information of a company as per the law and relevant regulations are the managers and owners of the business.

The Balance Sheet

Assets, liabilities, and equity accounts are reported on the balance sheet. The balance sheet utilizes financial accounting to report ownership of the company’s future economic benefits. It reports the company’s financial position at a particular date. The balance sheet reports the company’s resources (assets), namely, what the company owns. The balance sheet also reports the sources of asset financing.

Income Statement

Financial accounting results in the determination of net income at the bottom of the income statement. An income statement is a useful management tool used in measuring a company’s financial performance over a period. The end report shows whether a company is profitable or being run at a loss.

Statement of Cash Flow

This report measures the utilization of cash over financing, investing, and operating activities of an organization. The aim is to get the net cash flow at the end of the period, movement of cash out of the business is called cash outflow while the movement of cash into the business is called cash inflow. A statement of cash flow is used by managers to better understand how cash is being spent and received in the organization.

Statement of Shareholders’ Equity

The statement of stockholders’ equity reports the changes in the equity structure over a period. Changes can arise by:

• Additional Contributed Capital
• Retained Earnings, this is net income less dividends paid out.
• Non-controlling Interest of minority shareholders.

Importance of Financial Accounting

Organizations maintain their financial accounting records for the following reasons:

• Financial accounting decreases risk by increasing accountability. It makes the managers accountable to the owners of the business, the government, and other regulators.
• Financial accounting provides insight to management on profitability measurement.
• Financial accounting helps track income and expenditures.
• It provides investors, management, and government with quantitative financial information which can be used in making business decisions.

Until next week when we will be considering another reflection on my learnings at LBS, have a great week ahead.

Wale