Guest Author - Mary Salzman

Financial accounting is the accounting process of classifying and recording all events that took place during the normal course of the doing what ever it is the company is in the business of doing.

The results of these events are then arranged on the correct financial statement and reported to the external users of the financial statements. External users include investors, creditors, banks and regulatory agencies such as the IRS and the SEC.

External users of the financial statements differ from internal users in that the external user is generally considered to be the uneducated user of the financial statement. That is to say, the external user has no clue as to what is going on within the company.

Financial Accounting is used in all three types of businesses: service, merchandising and manufacturing. It is a needed accounting skill in all types of business entities (sole proprietorships, flow through entities and corporations). Financial accountants will primarily be employed by for profit businesses.

The results are reported to the external users through these three primary financial statements that are prepared by financial accountants:

· Balance Sheet shows a company’s assets, liabilities and owners' equity at a specific point in time.

· Income Statement shows a company's operating performance (revenues, expenses and net income) for a defined period of time. For example – for the 12 month period ending December 31, 2005.

· Statement of Cash Flows shows the company's sources of cash and uses of cash over a specific period of time. The statement of cash flows combines most of the components of the balance sheet and the income statement.

Users of the financial accountant’s statements:

· Stockholders and potential stockholders to decide whether or not to purchase stock in the company.

· Banks and creditors use the financial statements to decide whether or not loaning money or extending terms to the business is a good idea (is the company doing well enough to repay the debt?).

· Regulatory agencies use the financial statements to judge the accuracy of financial information that is reported in other venues – for example – on the federal tax return.

Financial accountants use generally accepted accounting principles (GAAP) as their guide to reporting the results of operations.

All publicly traded companies will have an annual independent audit by a certified public accountant (CPA). And while a CPA can also be a financial accountant a CPA can not audit financial statements they have prepared.