Introduction to financial reporting

Published on February 28, 2017   10 min
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Welcome to this HSTalks series on Analyzing Financial Statements. My name is Dr. David Bond.
For those who aren't familiar with cricket, this is an image from a cricket test match at the Lord's Ground in London. Why am I showing you a picture of a cricket match you're probably asking? Well, the reason is that test matches can last five days with six hours of play each day. Now as much as I'd like to, I can't spend that sort of time watching it. So to find out how the match is going, I just check out the scoreboard. And whoa, there's a lot going on there. The thing is because I grew up around cricket, I can understand what's going on here quickly, and that's because I can understand the language of cricket, which brings me nicely and neatly to accounting, pretty smooth segue. Accounting is the language of business. As much as that is a cliché, it's also true. Accounting allows business owners, large and small, to understand how they're performing, what's working well, what's not working well, and to make strategic decisions. Knowing how accounting works and how to read accounting reports is a critical skill for anyone in business, whether as a CEO of a large multinational or a founder of a startup, it can even be useful in your personal life.
Accounting, as a subject, is typically split into two primary types, financial, and management. Financial accounting is concerned with how entities prepare financial statements, like the income statement, or external uses, i.e., shareholders. Management accounting is concerned with how entities prepare reports like budgets for internal users, i.e., management.
The key differences between financial and management accounting are as follows. The intended user for financial accounting is external to the entity, whilst for management accounting, the intended user is internal. The time period for financial accounting is historical. By this, I mean that financial reporting statements are constructed based on events which have already happened. Management accounting is generally the opposite in that management accounting reports are interested in the future and what may happen. Lastly, standardization, financial accounting is heavily regulated and standardized as will be discussed shortly. Management accounting reports are only used within the entity, so the entity and its management are free to choose how they construct these. The focus of this series is primarily on financial accounting or, as I'll refer to it from now, financial reporting.