Why Learn Financial Accounting?
In financial accounting, all of a company’s monetary transactions in a given period are recorded in financial statements. Documenting these transactions, such as income and expenses, helps determine the company’s operating health. Publicly traded companies face continual board and investor pressure for financial performance. Accounting and finance professionals learn financial accounting so they can provide clear, concise reporting.
Principles and Standards
Two well-known types of accounting are financial and managerial. Managerial accounting — also known as management accounting and cost accounting — is the area in which reports are generated for management and other internal users. The reports provide a basis for improving business efficiency and evaluating projects. Financial accounting is the area in which reports are generated for external users: outside investors and the government, for example.
The reports generated are governed by generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). GAAP and IFRS are intended to ensure transparency and accuracy. Many students learn why financial accounting is so vital by observing events such as the Enron scandal in the early 2000s. This massive corporate failure heightened the importance of having clear, accurate financial statements and preventing illegal accounting practices.
Types of Financial Statements
Three primary financial statements are used in financial accounting: balance sheets, income statements, and cash flow statements.
- Balance Sheet
The balance sheet reports the assets, liabilities, and equity of a company, which allows an investor to quickly see what a company owns, what it owes, and how much capital belongs to shareholders. A balance sheet is expected to show how the assets are equal to — or balance out — the liabilities and shareholders’ equity.
- Income Statement
The income statement reports what a company earned in revenue over a given period; the costs incurred to generate this revenue are not included. When investors or accountants refer to the “bottom line,” they are referring to the net gain or loss on the income statement or the profit and loss (P&L) statement.
- Cash Flow Statement
The cash flow statement reports the cash and cash equivalents, such as short-term investments, that are moving into and out of a company. There are three parts to the cash flow statement: operating, investing, and financing activities.
Finance professionals may be familiar with financial statement ratios such as the debt-to-equity ratio and the inventory turnover ratio. While these ratios are not typically published on financial statements, investors use them to evaluate a company’s financial health, such as how much debt a company has compared with equity.
Accounting and finance students who understand why learning financial accounting is valuable to a company will find several in-demand and high-earning careers are available.
- Financial Analyst
Financial analysts evaluate historical and current financial data and recommend investments or efficiency improvements. There are two types of financial analysts: buy side and sell side. Buy-side analysts create investment strategies for companies, while sell-side analysts provide advice to agents selling investments. The U.S. Bureau of Labor Statistics (BLS) projects that employment for financial analysts will grow 11 percent from 2016 to 2026 — 4 percent more than the national average for all jobs. The 2017 median salary for a financial analyst was $84,300, according to BLS.
- Financial Manager
Financial managers prepare and analyze financial reports, sometimes leading a team of accounting employees in their production. Employment of financial managers is expected to grow 19 percent from 2016 to 2026, compared with 7 percent for all other occupations, according to the BLS. The 2017 median salary for financial managers was $125,080, according to the BLS.
- Portfolio Manager
Portfolio managers look after a company’s investment portfolio. Portfolios contain various investment vehicles, such as stocks and bonds. A portfolio manager’s primary responsibility is to ensure that a portfolio is growing. According to PayScale, the average salary for a portfolio manager is $83,525. As portfolio managers are a type of financial analyst, job growth for that sector is similarly expected to increase 11 percent from 2016 to 2026, according to the BLS.
- Financial Controller
Financial controllers oversee the preparation of financial reports. They will often present these reports to executive leadership, offering insight into the company’s financial performance. Controllers are responsible for specific aspects of a company, such as accounting and auditing. PayScale reports that the average salary for financial controllers is $80,306. Job growth for controllers, classified as financial managers by the BLS, is projected to increase 19 percent from 2016 to 2026.
- Personal Financial Advisor
Personal financial advisors meet directly with clients to discuss their financial goals and risk tolerance. A personal financial advisor can provide advice about a home purchase, estate planning, and family planning, among other goals. Most often, clients rely on an advisor to monitor their investments and help them make decisions to improve their performance. Job growth for personal financial advisors is projected at 15 percent from 2016 to 2016 — 6 percent more than the national average. The 2017 median salary for personal financial advisors was $90,640, according to the BLS.
Accounting professionals know why learning financial accounting is central to a company’s success. Financial accounting provides a clear, accurate, honest picture of a company’s fiscal health, and those professionals who can support this process can find success in the aforementioned careers and beyond.
Find out more about how Ohio University’s online Master of Accountancy program strives to prepare students for success as financial professionals.