This text is designed to teach accurate financial accounting, which has the communication of relevant financial information to internal and external users as its primary subject. This volume represents to focus on new directions with special emphasis on concepts, rational, measurement, and reporting. With this in mind, I have attempted to impart these principles in this book. All of the financial terms are described using easy-to-understand terminology, as are the financial ratios. I believe this book would make an excellent addition to the library of any finance or non-finance individuals who are involved in personal or business accounting. I hope this book will be a key to every reader's success.

Principles of Business Financial Accounting

By Pramod Gupta

AuthorHouse

Copyright © 2012 Pramod Gupta
All right reserved.
ISBN: 978-1-4772-6775-2

Contents

Preface................................................................ix1 Introduction to Accounting...........................................12 Accounting Information...............................................73 Accounting and Reporting.............................................334 Cost Method of Accounting............................................515 Internal Control, Audits, and Sarbanes-Oxley Act.....................796 Accounts Payable and Suppliers.......................................977 Mergers and Acquisitions.............................................1058 Financial Market.....................................................1179 Appendix A...........................................................14510 Financial Statements Walmart Stores, Inc............................145Glossary...............................................................191Solution...............................................................201References.............................................................205Index..................................................................207

Chapter One

Introduction to Accounting

The accounting function has an important role in the successful operations of today's successful business. The American Accounting Association (AAA) defined accounting as "the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of that information." Accounting has oft en been called financial management language, such as in terms of net income, assets, liabilities, and so forth. This function provides relevant information to internal and external decision makers. The internal parties are managers, chief financial officers (CFOs), presidents, chief executive officers (CEOs), and so forth. The external parties include investors, creditors, and federal, state, and city tax agencies (for example, sales, property, and income taxes). Financial accounting's objective is achieved as per Generally Accepted Accounting Principles (GAAP) through the preparation of periodic financial statements ( income statement, balance sheet, change of financial position, and so forth). Financial statements that are distributed outside of a company are to be prepared in accordance with GAAP. Also, financial accounting effectively processes business transactions so informative financial statements can be prepared. It is the process of recording information and maintaining accounting books, activities that are also called bookkeeping. Independent certified public accountants (CPAs) must audit the financial statements of the corporation whose stock is publicly traded. These CPAs certify that the financial statements were prepared in accordance with GAAP.

Financial accounting serves those who use the information it provides in three separate but related ways:

1. Accounting provides an important information base on particular analytical orientation that helps the decision maker assess the potential financial implications and various alternatives that are being considered. Such interested parties include potential investors, government agencies, customers, and so forth.

2. Accounting provides a continuing measurement of the financial effects of a series of decisions already made, the results of which are communicated to the decision makers via periodic financial statements, including income statements, balance statements, and statement of change financial position.

3. Accounting keeps track of a wide range of items to meet the safeguarding responsibilities imposed on all organization by the company. This is called internal control.

The Need of Financial Accounting

The Financial Accounting Standards Board (FASB) is a private sector, independent rule-making agency that is the main source of GAAP. Financial accounting provides decision makers with useful information in making economics decisions. There are many type of economics decision. The terms "financial accounting," "tax accounting," and " inventory accounting" describe the accounting information in the business community.

Financial accounting refers to the information described in financial statements and used for many different purposes. Investors make decisions with it, banks and creditors provide credit limits with it, and internal management makes sound decision for company position, such as profit, earning per share, cash flow, and so forth, with it.

Tax accounting is used in preparation of income tax, property tax, and so forth. All tax returns are based upon the company's financial information. However, the financial information is oft en adjusted for income tax reporting requirements.

Inventory accounting reports the inventory status. Inventory could be the single largest asset on some company's balance sheet. Inventory is very important for manufacturers and retailers, while financial institutions do not carry any or very little inventory. The cost of inventory is reported on the balance sheet as a current asset.

Type of Business Entities

There are three types of business entities:

1. A business owned by one person is called a sole proprietorship. Generally, the owner is also the manager of the business. For example, small retail businesses or service establishments are sole proprietorships.

2. A business owned by at least two partners is called a partnership. The agreements among the owners are set forth in a partnership contract. Each partner is responsible for the debts of the business, which is called "unlimited liabilities." Partners are jointly responsible for all the risks of the business and jointly receive all the profits of the business.

3. A business incorporated under the law of a particular state, whereby the owners are known as shareholders or stockholders, is a corporation. The state issues a charter, which gives the corporation the right to operate legally as an entity, separate and apart from its owners. Ownership is represented by shares of capital stock owned by individual shareholders that can be bought and sold. The owner has limited liabilities, that is, he or she is liable for the debts of the corporation only to the extent of his or her investment. The shareholders elect a board of directors.

Management Accounting and Financial Accounting

Management accounting is more than just bookkeeping and reporting. The organization also uses the basic raw data in a number of other purposes, for example, the process of preparing management accounts that provide accurate and timely key financial and statistical information required by managers to make day-to-day and short-term decisions. Management accounting generates weekly or monthly reports for the firm's internal users, such as department manager, CFO, and CEO. These reports provide current status of the cash flow, revenue, orders on hand, raw material, risk exposures, and other statistics such as trend chart.

According to the Chartered Institute of Management Accountants (CIMA), management accounting is:

[T]he process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management group such as...