1.1 Financial Accounting & Cost Accounting
Importance of Financial Reports
- Investors – To decide if they should invest.
- Lenders – To judge if they should give a loan.
- Tax authorities – To calculate taxes.
- Suppliers – To decide if they should extend credit.
- Customers – To assess company reliability (sometimes).
These people are called external users of financial information.
Managers as Internal Users
Managers are the biggest users of accounting info. They use it for:
- Planning
- Decision Making
- Controlling
Two Main Types of Accounting Systems
| Type of Accounting | Purpose |
|---|---|
| Financial Accounting | Records transactions between the company and external parties. |
| Cost Accounting | Tracks internal costs and inventory for internal use. |
What Financial Accounting Does
Records transactions with:
- Suppliers
- Employees
- Lenders
- Investors
- Customers
Prepares 3 main financial statements:
- Income Statement – Profit/Loss over a period.
- Balance Sheet – Assets, liabilities, and equity at a point in time.
- Cash Flow Statement – Cash inflows and outflows.
Cost of Sales – Why and How to Calculate
You must subtract:
- Value of materials in stores
- Value of work in process
- Value of unsold finished goods
This gives the actual cost related to the sold items.
Role of the Cost Accountant
Tracks:
- Material issued to production.
- Movement of semi-finished and finished goods.
- Provides the closing inventory value (materials, work-in-process, finished goods).
Helps the financial accountant:
Profit = Sales – Expenses – Closing Stock
Birth and Growth of Cost Accounting
- Developed as a sub-system of financial accounting.
- Needed to value closing stock accurately.
- Now used for more than just stock valuation:
- Helps in managerial decisions
- Used for pricing, cost control, efficiency.
Modern Use of Accounting Information
Companies now use accounting info for:
- Studying competitors
- Understanding customers
- Analyzing suppliers
Example:
- A software company identifies firms with high inventory values.
- Then pitches inventory management software to them.
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