Financial Systems

Financial Accounting

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Priya Kaur

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Christian Bien

Learning Objectives

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What is Financial Accounting?
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Financial accounting is the production and reporting of general purpose financial reports for external users to make decisions and evaluate the financial health of a company. 

In other words, anything an accountant produces that is to be viewed by someone outside the business is known as financial accounting.

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General Purpose Financial Reports
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General-purpose financial reports are financial reports used by external users that inform on the past financial performance, position and other activities of a company. 


General-purpose financial reports could include: 

  • Statement of Financial Position (Balance Sheet) 

  • Statement of Comprehensive Income (Income Statement) 

  • Statement of Cash Flows 

They are called general purpose financial reports as they do not serve a specific purpose and provide an overview of the company's financial as a whole for a certain period. 


External Users 

External users are people who rely on general-purpose financial reports to make financial decisions and to evaluate the financial health of the company. 


External users could include: 

  • Investors: used to decide whether to hold, sell or accumulate shares in a company 

  • Financial Institutions: used to determine a company's accessibility to a loan 

  • Government: The Australian Tax Office (ATO) could use financial information to determine the appropriate level of tax to be paid by the company. 

  • Creditors: used to determine the level of risk of the company 


Frequency 

General-purpose financial reports are required to be produced on a periodic basis. Most public companies by law, are required to produce general purpose financial reports once a year but those listed on the ASX are often subject to even tighter regulation with the production of quarterly and half-yearly reports as well as the annual report.

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Rules and Regulations
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The production of general-purpose financial reports is subject to strict rules and regulations. The production of these reports must confine by: 

  • AASB Standards 

  • Accounting Conceptual Framework 

  • Corporations Act 2001 

  • ASX Listing Rules (if listed on the ASX) 

The heavy regulation ensures that external users are not misled and that the financial reports represent a true and fair view of the financial health of a company. Most reporting entities are required to have their general purpose financial reports to be checked by an independent accountant known as an external auditor.

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