Financial science is a broad term for things about the study, development, management and distribution of financial assets and liabilities. In particular, it addresses the issues of why and how an individual, firm or government gets the money required for its activities and how those funds are used or spent. It also involves understanding the risks and benefits involved in various financial transactions and managing those risks and rewards. Financial science also includes understanding the risks involved in financial markets and the ability of financial institutions and individuals to behave in an orderly fashion in those markets.
All the processes that financial managers apply in the management of their firm’s finances have one end result: balancing the books. When this goal is achieved, the firm can begin to earn profits. When the balance between the equity and retained earnings exceeds the income and assets of the firm, profits and revenues are realized. Profits and revenues are therefore the sole measure of success in the business world, accounting notwithstanding other measures of success, such as the stock market returns.
A financial statement contains two parts: a balance sheet, which list the firm’s assets, liabilities, revenues and surplus; and a statement of cash flows, which summarize the operations for a given period, including balance sheet items. The balance sheet is usually prepared by the accountant or financial manager who prepared the statement of cash flows. In general, the larger the firm’s size and number of creditors, the more complex and sophisticated the balance sheet will be.
Financial statements must be prepared on a daily basis for a variety of reasons. First, they must provide information to the Board of Directors and the Management and Finance Department, and they must be prepared accurately, especially in times of financial crisis. Second, the information must be verified internally by the firm’s senior management and accounting staff, as well as externally by outside analysts. This verification process is usually referred to as the “due diligence process.”
To prepare balance sheets of financial reports, there are two methods commonly used. The first method is called “probable cause” accounting, which refers to the need for information that is more than merely supposition or opinion. Probable cause refers to a specific event that could have caused an accounting record to be made, but has not been. Under this approach, the accounting records are examined for any inconsistency with the information provided to support the claim that an event occurred that is referred to as “probable cause,” and is then either excluded from the balance sheet or shown as being a minor transaction with no effect on the financial statements. This approach usually results in more problems for the accountant’s assistants who work on the balance sheets than the preparation of the statements itself. Another advantage is that this method may not be accurate in all cases.
A second method of preparing financial reports is called “procedural accounting,” which refers to the method applied in order to arrive at the financial statements of the corporation. This method is most often used in situations where the corporation is operating and is generating revenues, as opposed to its carrying costs, and in situations where there is little room for error. This method may be complicated and laborious, but is less prone to errors than the probabilistic method. It can also be more accurate.
Generally, the preparation of the basic financial statements involves a study of the income and expenses of the company over a period of time, together with analysis of those items with respect to revenues and expenses. The balance sheets provide the basis on which the financial statements are based, and the reporting requirements are generally designed to be consistent with the requirements of the basic accounting principles. In order to make accurate financial reports, it is important for the accountant to meet all of the criteria set forth in the Generally Accepted Accounting Principals (GAAP), which is a standardized approach to accounting.
Other necessary procedures, such as preparing the cash flow statement, balance sheet, profit and loss statement, and statement of cash flows, are also commonly required when preparing the basic financial statements. The preparation of financial statements is also an essential part of the preparation of the corporate report for the purpose of filing taxes. The financial statements provide an accurate portrayal of the financial situation of the company, usually in the form of reports that show a company’s assets, liabilities, ownership equity, and net worth. This allows businesses and individuals to understand their financial position and assists them in making strategic and planning decisions.