Financial accounting is the procedure of classifying and recording all events that took place during the normal course of business.  The results of these events are then reported to the external users of the financial statements.  External users include stockholders, creditors, banks and regulatory agencies such as the IRS and the SEC

 

Financial Accounting is used in all three types of businesses: service, merchandising and manufacturing.  It is a needed accounting skill in all types of business entities (sole proprietorships, flow through entities and corporations).  Financial accountants will primarily be employed by for profit businesses.

The results are reported to the external users through these three primary financial statements that are prepared by financial accountants:

1. Balance Sheet shows a company’s assets, liabilities and owners' equity at a specific point in time.
 
2. Income Statement  shows a company's operating performance (revenues, expenses and net income) for a defined period of time.  For example – for the 12 month period ending December 31, 2005.

3. Statement of Cash Flows shows company's sources of cash and cash payments over a specific period of time.   The statement of cash flows combines most of the components of the balance sheet and the income statement.

Users of the financial accountant’s statements:

 

a. Stockholders and potential stockholders to decide whether or not to purchase stock in the company.

 

b. Banks and creditors use the financial statements to access whether or not loaning money or extending terms to the business is a good idea (is the company doing well enough to repay the debt).

 

c. Regulatory agencies use the financial statements to judge the accuracy of financial information that is reported in other venues – for example – on the federal tax return.

 

Financial accountants use generally accepted accounting principles as to guide to reporting the results of operations.

 

All publically traded companies will have an annual independent audit  by an independent certified public accountant.