Here is a term paper on ‘Financial Accounting’. Find paragraphs, long and short term papers on ‘Financial Accounting’ especially written for school and college students.

Term Paper Contents:

  1. Term Paper on the Introduction to Financial Accounting
  2. Term Paper on the Users and Uses of Financial Accounting
  3. Term Paper on Managerial Accounting and Financial Accounting
  4. Term Paper on the Backdrop of Financial Accounting
  5. Term Paper on the Major Financial Accounting Statements
  6. Term Paper on the Limitations of Financial Accounting

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Term Paper # 1. Introduction to Financial Accounting:

Financial accounting is the preparation of financial information in accounting form. It refers to the preparation of general purpose reports of financial nature for use in the analysis of the performance of any economic unit. It can be used by both the external users and internal Management. It helps the external users for diverse purposes depending upon the users. For example, financial analysts and investors use them for valuation of the firm’s share, intrinsic worth of the company and the profitability and profit earning capacity.

Stock Exchanges use this information for dissemination to public and for examining the Company’s compliance with the listing requirements as per the Listing Agreement. This information gives direct and indirect tools for control and audit and decision-making by the management. But Management has also access to other information on different segments, divisions and sections and breakdown data from ledgers, Journals and internal books of account.

Accounting Information:

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Accounting information means economic and financial information in a broad sense of any economic unit, be it a company, firm, govt., etc. This information is provided in terms of a monetary unit, say Rupees in India or Pound Sterling in U.K. or Dollars in U.S.A., under the assumption that the monetary unit retains its original value.

Financial accounts are concerned with the measurement of economic re­sources, obligations and changes in them in a monetary unit in the form of financial statements. These financial statements include a wide variety of statements of accounts some of which are Income-Expenditure statements, Balance Sheets, Profit allocation statements, flow of funds statements, etc. The contents of these statements have meaningful information to decision makers. These are all recorded facts regard­ing the economic unit on their operations, production, consumption, sales and marketing, net results, allocation of profits, etc.

The importance of these accounts lies in the configuration and true represen­tation of the operations and the results of the operations. This gives the necessary background material for understanding the position, financial or otherwise of any economic unit, called the economic information, in an accounting form.

Accounting System:

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Accounting system varies from unit to unit but with the same basic objective of measuring, describing and communicating the financial data to users. Journals, ledgers and other accounting books used in processing financial accounting informa­tion depend on the concept what is called Double entry book-keeping system. Generally Accepted Accounting Principles (GAPP) are used as the most widely acceptable Technique of accounting. The GAPP encompasses many conventions, Rules, procedures and methods of presentation, which are necessary to define the accounting practice at any point of time. The GAPP also includes broad guidelines of general application along with the detailed practices and procedures.

The method of recording accounts may be on cash basis or accrual basis. Cash basis means recording only on the basis of actual cash inflow or outflow. Accrual basis means reporting only on the basis of the time of accrual whether received or paid at that time or not. These two reporting systems should not be clubbed in any accounting system as that would give a distorted picture which is not economically meaningful. The two systems may give completely different pictures of the opera­tions of the economic unit.

Term Paper # 2. Users and Uses of Financial Accounting:

The users of financial accounts are diverse groups and for different purposes and objectives. Some users which are mostly external may have direct interest, as in the case of shareholders, who are owners of the company. This accounting informa­tion is also useful to creditors, suppliers of inputs, users of output, tax authorities, Govt., Trade and Industry Associations, Trade unions among a number of others. Stock exchange brokers and financial analysts and reporters use the data for the benefit of general public and actual and potential investors. As this is general purpose information, many groups of users may be there.

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Financial accounting has many uses and provides rich conceptual and opera­tional data. It shows the operational results and the actual distribution of the operational profits. It helps the owners to know the value of their investment. The creditors and other public members come to know the credit standing, liquidity and solvency of the company. It helps the managerial decision-making take a review of the operations and pursue corrective measures as and when necessary. The manage­ment derives the maximum use from this data for improving their efficiency and the corporate profitability.

Term Paper # 3. Managerial Accounting and Financial Accounting:

The two major branches of accounts of a corporate unit are Managerial accounting and financial accounting. There are also other branches like cost ac­counting, social accounting etc. Managerial accounting refers to internal accounting of various departments, divisions, sections, etc., and encompasses all operational data useful for planning and budgeting, control and decision-making. It has relevance to planning and decision making based on segmented product wise or process wise costs, and other relevant data. It is used for budgetary exercises, target fixing, and control of Management, top level, middle level and lower level, etc.

Internal reporting from bottom to top on target achievement, cost control, observance of work norms and operational Manual helps the middle and top level management for effecting managerial control, cost control and performance evalu­ation, based on work norms and targets fixed.

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Managerial accounting is thus aimed at accounting of all internal departments, divisions and processes to the management — Lower, Middle and Top Management for the purposes of control, planning and budgeting, proper administration for efficiency and productivity with the objective of maximisation of investor wealth. It is internal accounting for internal use by the management mainly aimed at helping the management at cost control, improvement of efficiency and profit making through proper decision-making.

Financial accounting is on the other hand external reporting through formalised, legalised and regularised statements giving the financial and economic information, useful to outsiders, other than the corporate unit. The interested parties are share­holders of the company, investors in general, creditors and debtors of the company, employees, government departments, Stock Exchanges, SEBI, R.O.C., under the Companies Act, Investor Associations, Financial Analysts and Intermediaries in the Capital Market, financing banks and F.I.s and Industry Associations.

These data throw light on the operations and their results, profitability, value of the firm and their efficiency, solvency and liquidity. The financial accounts encompass, among others, income or revenue statement, capital expenditure, projected or work in progress, Balance Sheet, profit allocation statement and funds flow and cash flow statements and other related financial information.

Financial accounting has objectives and purposes completely different from those of Managerial accounting. Ideally both should cover the same information about the company, with differences in details and emphasis. Managerial accounts involve also some specialised reports of experts and consultant on operational research, Market research, M.I.S. computer systems, etc. As such, it involves and encompasses a diverse range of disciplines like economics, Industrial engineering, Management services, computer science, etc. in addition to accountancy.

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Basically cost and price information and analysis are part of both managerial and financial accounting. Both deal with economic events and are part of the total accounting system. Both qualitative and quantitative aspects are involved in the analysis of all economic events. Both the financial accounting and Managerial Accounting deal with financial statements, revenues, expenses costs, cash flows etc. To a large extent, both are based on the same data base, which originate from the accounting requirements and reporting requirements of any economic unit.

Managerial and financial accounts are two phases of the same data base, arising out of the operations in physical form of the economic unit. Both aim at analysing the data for productivity and profitability. While management proceeds with a view to maximise the investor wealth assuming the management is professional, financial accounting enables the user to examine and assess the extent of achievement of the Management in its objectives and goal of maximizing the investor wealth. The tools and techniques may be different but the ultimate goal of maximizing the investor wealth through improvements in efficiency and productivity remains the same for the management as well as those interested in the unit.

Term Paper # 4. Backdrop of Financial Accounting :

The need for analysis and forecasting for the purpose of financial operations is well-known. The data, necessary for the purpose emanate from the accounts — income and expenditures statements and balance sheet statements and other related statements. The analysis of these statements is the basis for assessing the financial performance of any company or organisation.

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Financial information and data for analysis emanate from another source, namely, internal books of accounts — journals, ledgers, day book, etc. These are not published by the company but are available to the management for the control, monitoring and audit. Both the published financial statements and the unpublished data, as seen above are necessary for Financial Economics.

Banks are providing credit on the need based assessment and not on security alone. For this purpose, the viability of the project, financial soundness of the company and the prospects for its operations are examined by banks. The assessment of credit needs of any unit is based on the purpose, project and performance (three ps). For such an assessment by bankers, financial analysis and tools of analysis are required, which necessitate expertise in accounting concepts and their interpretation and statistical tools for analysis and forecasting.

Thus, a banker, a manager or an investor would look into the accounting concepts and their interpretation and statistical tools for analysis and forecasting. Thus, a banker, a manager or an investor would look into the accounts of company, their financial data and financial state­ments for analysis and interpretation. It is in this background that source of know­ledge of the accounting concepts and conventions should be familiar to the treasury manager and funds manager.

The management has itself a deep involvement in such analysis and their interpretation. They have to plan for the financing of current operations, capital needs for expansion and diversification and for raising of such resources from the least cost sources and least cost combinations of capital. They are interested in the efficient use of capital and keep cost of capital and labour as low as possible to maximise the profits and to improve the net worth of the company, so as to keep share price moving up and investors happy.

Term Paper # 5. Major Financial Accounting Statements:

The accounts of company or any economic unit are recorded on a daily, monthly and annual basis. The physical operations of a company involve financial commitments, viz., inflows and outflows. The most important statement for the accounts are the income and expenditure statements giving out the financial results of the operations over any period of time, monthly, quarterly, half yearly or yearly, profit or loss position seen from statements as also the disposition of profits through profit allocation statement.

There are a number of other statements all presented in the form of schedules to the balance sheet. Balance sheet is a standing position of the company in terms of assets and liabilities at any point of time presented in India every six months and yearly. The net results of the company in the form of profit or loss are carried to the balance sheet.

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The assets and the liabilities of any unit should be equal and balance and hence called balance sheet. Thus next to income expendi­ture statements, balance sheet is the most important accounting data for the financial analyst. Not only the above published data, but the unpublished internal records of Stock Receivables, Payables etc. are necessary for assessing the company’s financial position.

In these and other financial statements there are a number of concepts which are subject to ambiguity and misinterpretation. In fact each item in the balance sheet and income expenditure and other related financial statements should be clearly understood by the analyst although only a few of the ambiguous and complicated concepts.

Term Paper # 6. Limitations of Financial Accounting:

There are however many limitations of financial accounting. It does not provide detailed breakdown data of various products, processes and division inside the company. It does not provide cost data on manufacturing, marketing and other related services, which are available internally for the management.

Specific items of information such as on productivity, reasons for losses, seasonal variations in demand etc., are not provided by the Financial I accounting. Besides it does not provide insider information on the process of controlling inventory, accounts receivable, division-wise operations, profits or losses. Historical data including the last, half yearly data does not give an insight into the current costs, demand and market off take, etc. This data do not allow an analysis of costs of different process and activities including marketing. Industry standards of costs of different products are supplied by Industry Associations to the Govt., which is not provided in this information.

The recording of accounts with regard to wages and labour used separately in respect of different jobs, process, products and departments is not done in this information. Social cost and benefit analysis and inflation adjusted rupee value of the companies’ activities are not provided in these data. Some foreign countries insist on their companies to provide economic information relating to inflation adjusted accounting data in a time series fashion to provide comparable data, year wise.

For accurate analysis for forecasting, the accounts in financial statements should be taken with caution, as they may contain changes in Inventory Costing, valuation of fixed assets and in method of providing for depreciation and in taxation. As the objective of the analyst is to know the real and correct position and accurately comparable earnings per share and P/E multiple for security valuation, he should know the primary earnings and secondary or fully diluted earnings per share.

The primary earnings show the prima facie earnings, divided by the number of shares issued and thus assumes that there are no options or warrants to be exercised for conversion into equity and that the earnings reflect the true earnings to be available to all equity shareholders. An example will make the difference clear between primary earnings and secondary earnings per share which are adjusted for any preferred payments or likely conversions of options and warrants.

Earnings per share are lower, if all adjustments are made for conversion and equity or stock is diluted accordingly.

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