Finance Tips

Introduction:

Accounting principles are the assumptions and rules of accounting the methods and procedures of accounting and the application of these rules, methods and procedures to the actual practice of accounting.

Definition of Accounting:

The American Institute of Certified Public Accountants defines accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events, which are, in part at least, of financial character, and interpreting the results thereof”.

From the above, it is clear that, Financial Accounting basically deals with Financial Transaction. Its functions are described as follows: Continue reading ‘ACCOUNTING PRICIPLES-SOME THOUGHTS:’ »

The Unresolved Flaws in Financial Accounting

The users of accounting information include company owners, managers, investors, creditors, and government agencies. It is generally acknowledged that most financial reporting is “primarily externally oriented” and most of the users are nonaccountants who get frustrated trying to understand the statements. Since they are not part of the management team, they more or less are looking from the outside in.

Despite the many accounting associations from the Accounting Principles Board to the American Institute of Certified Public Accountants to the Financial Accounting Association that established the Financial Accounting Standards Board, there continues to be alternative ways of reporting which adds to the confusion and limitations of financial reporting. Continue reading ‘The Unresolved Flaws in Financial Accounting’ »

Ratios are highly essential profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas.

Ratio analysis is primarily used to compare a company’s financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can also see how your ratios stack up against other businesses, both in and out of your industry.

There are several considerations you must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies.

• If you are making a comparative analysis of a company’s financial statements over a certain period of time, make an appropriate allowance for any changes in accounting policies that occurred during the same time span.
• When comparing your business with others in your industry, allow for any material differences in accounting policies between your company and industry norms.
• When comparing ratios from various fiscal periods or companies, inquire about the types of accounting policies used. Different accounting methods can result in a wide variety of reported figures.
• Determine whether ratios were calculated before or after adjustments were made to the balance sheet or income statement, such as non-recurring items and inventory or pro forma adjustments. In many cases, these adjustments can significantly affect the ratios.
• Carefully examine any departures from industry norms.

Ratio Analysis is a useful tool in the following aspects:

Evaluation of Liquidity: The ability of a firm to meet its short term payment commitments is called liquidity. Current Ratio and Quick Ratio help to assets the short-term solvency (liquidity) of the firm. Continue reading ‘RATIONALE AND CONTEMPLATION OF RATIO ANALYSIS’ »

All organizations, whether private, public, or non-profit, need to prepare financial statements on their performance to provide fiscal accountability and accuracy to their stakeholders and people with an interest in the company. Financial statements enable management to make business decisions, enable creditors to evaluate loan applications, and provide individuals with information to make investment decisions.

Financial statements provide information from an organization’s accounting documents about their economic resources and obligations on a specific date, as well as their financial activities over a period of time. Financial statements are usually prepared in accordance with Generally Accepted Accounting Principles (GAAP), which are the standards issued by the American Institute of Certified Public Accountants (AICPA), but they may also be prepared on other comprehensive basis of accounting, such as cash basis or tax basis, depending on the needs of the users of the financial statements.

The lowest level of assurance in regards to financial statements is compiled financial statements. One of the main reasons these are used in lieu of other financial statement presentations is for the timely release of financial information about an organization. Compiled financial statements are presentation of various financial reports and documentation, which is the representation of management or owners of an organization. Compilation standards allow the organization to omit note disclosures as long as there is no intent to mislead the users. This is the only type of financial statement that allows omitted disclosures. Continue reading ‘What are Compiled Financial Statements?’ »

All organizations, whether private, public, or non-profit, need to prepare financial statements on their performance to provide fiscal accountability and accuracy to their stakeholders and people with an interest in the company. Financial statements enable management to make business decisions, enable creditors to evaluate loan applications, and provide individuals with information to make investment decisions.

Financial statements provide information from an organization’s accounting documents about their economic resources and obligations on a specific date, as well as their financial activities over a period of time. Financial statements are usually prepared in accordance with Generally Accepted Accounting Principles (GAAP), which are the standards issued by the American Institute of Certified Public Accountants (AICPA), but they may also be prepared on other comprehensive basis of accounting, such as cash basis or tax basis, depending on the needs of the users of the financial statements. Continue reading ‘What are Reviewed Financial Statements?’ »