Describe the function and primary focus of financial accounting.
Financial accounting refers to the process of recording, summarizing, and reporting financial information in a business. It entails the preparation of income statements and cash flow statements.
Answer and Explanation:
The primary focus of financial accounting is to present financial information regarding the performance of a company. Most importantly, the information is crucial for different stakeholders such as investors, creditors, and the government for decision making.
The functions of financial accounting include:
- Financial accounting is a tool of periodically reporting financial information of a business to its owners, the management, and other external parties. The information is used to analyze different aspects of a business, such as sales, profitability, expenses, and revenues.
- It is used as a basis of system control. The financial records of a business can be used for financial controls as well as minimizing risks associated with loss of money due to fraudulent activities. The information is also used for planning and budgetary functions.
- Preparation of financial accounting is an indication of compliance for meeting regulatory requirements. Basically, companies are required to prepare annual reports which are presented to the shareholders and the government.
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from Accounting 201: Intermediate Accounting IChapter 12 / Lesson 1