Managerial Finance

1. (A) What is financial accounting? (B) What are the end products of the financial accounting system? (C) Who are the users of such end products? (D) Why does an executive of an international company need a good understanding of financial accounting and reporting if the executive is not an accountant? (E) What accounting issues must an international company address that do not affect a company that operates in only one country? Explain in detail.

(5 points)

A. Financial accounting is a process every organization follows to keep track of its financial position. Financial Accounting records, summarizes and reports the company’s transactions through accounting statements like the balance sheet, income statement, statement of owner’s equity and the statement of cash flows. Preparation of these statements always follows the GAAP or Generally Accepted Accounting Principles and are prepared quarterly or annually by the management to inform its investors, auditors and tax authorities of the company’s standing.

B. The four end-products of the financial accounting system are the balance sheet, income statement, statement of owner’s equity and the statement of cash flows.

C. Financial statements are used by various people connected to the organization like the management (owners and managers), investors and creditors. The management uses the statements to analyze how the company is doing and to decide its future. The investors use it to decide if further investment in the company would be profitable and the creditors use it to decide if the company is reliable enough to lend money.

D. Simply put, accountancy is the language of business. For any executive to conduct business in this world, he or she needs at least the basic understanding of how financial accounting works. This is because unless an executive understands financial accounting and reporting, he would not be able to find out if the company is making profits or incurring losses. An executive of an international organization specially needs a good understanding of financial accounting and reporting because he should be aware of different accounting principles and rules that are followed in other countries to conduct business successfully.

E. An international company must address several issues regarding accounting. A few of them are:

Accounting Principles- While companies in USA follow GAAP for accounting, an international firm would have to follow a different accounting principle like IFRS (International Financial Reporting Standards). Hence, the company needs to be aware of that and adapt accordingly.

Currency Rates- International presence of a firm involves different currencies according to the country it establishes its offices in. The accountants of the firm need to be aware of the fluctuating rates between currencies and prepare statements accordingly. A fluctuation could