Accounting Principles

If financial accounting is going to be useful, a company's reports need to be credible, easy to understand, and comparable to those of other companies. To this end, financial accounting follows a set of common rules known as accounting standards or generally accepted accounting principles (GAAP, pronounced "gap").

GAAP is based on the fundamental principles of accounting-concepts such as cost principle, matching principle, full disclosure, going concern, economic entity, conservatism, relevance, and reliability. (You can learn more about the basic principles in Explanation of Accounting Principles.)

GAAP, however, is not static. It includes some very complex standards that were issued in response to some very complicated business transactions. GAAP also addresses accounting practices that may be unique to particular industries, such as utility, banking, and insurance. Often these practices are a response to changes in government regulations of the industry.

GAAP includes many specific pronouncements as issued by the Financial Accounting Standards Board (FASB, pronounced "fas-bee"). The FASB is a non-government group that researches current needs and develops accounting rules to meet those needs. (You can learn more about FASB and its accounting pronouncements 

In addition to following the provisions of GAAP, any corporation whose stock is publicly traded is also subject to the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government. These requirements mandate an annual report to stockholders as well as an annual report to the SEC. The annual report to the SEC requires that independent certified public accountants audit a company's financial statements, thus giving assurance that the company has followed GAAP.

Financial Accounting

What Does Financial Accounting Mean?

Reporting of the financial position and performance of a firm through financial statements issued to external users on a periodic basis.


Investopedia explains Financial Accounting

The key difference between financial and managerial accounting is that financial accounting is aimed at providing information to parties outside the organization, whereas managerial accounting information is aimed at helping managers within the organization make decision

Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement such as an income statement or a balance sheet.

Companies issue financial statements on a routine schedule. The statements are considered externalbecause they are given to people outside of the company, with the primary recipients being owners/stockholders, as well as certain lenders. If a corporation's stock is publicly traded, however, its financial statements (and other financial reportings) tend to be widely circulated, and information will likely reach secondary recipients such as competitors, customers, employees, labor organizations, and investment analysts.

It's important to point out that the purpose of financial accounting is not to report the value of a company. Rather, its purpose is to provide enough information for others to assess the value of a company for themselves.

Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB) is the organization that develops the accounting standards and principles. Corporations whose stock is publicly traded must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government.

Ratios Analysis

Accounting Ratios Definition, Advantages, Classification and Limitations:
The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply means one number expressed in terms of another. A ratio is a statistical yardstick by means of which relationship between two or various figures can be compared or measured. Ratios can be found out by dividing one number by another number. Ratios show how one number is related to another. 

Profitability Ratios:

Profitability ratios measure the results of business operations or overall performance and effectiveness of the firm. Some of the most popular profitability ratios are as under:

• Gross profit ratio
• Net profit ratio
• Operating ratio
• Expense ratio
• Return on shareholders investment or net worth
• Return on equity capital
• Return on capital employed (ROCE) Ratio
• Dividend yield ratio
• Dividend payout ratio
• Earnings Per Share Ratio
• Price earning ratio

Liquidity Ratios:

Liquidity ratios measure the short term solvency of financial position of a firm. These ratios are calculated to comment upon the short term paying capacity of a concern or the firm's ability to meet its current obligations. Following are the most important liquidity ratios.

• Current ratio
• Liquid / Acid test / Quick ratio

Activity Ratios:

Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also called turnover ratios because they indicate the speed with which assets are being turned over into sales. Following are the most important activity ratios:

• Inventory / Stock turnover ratio
• Debtors / Receivables turnover ratio
• Average collection period
• Creditors / Payable turnover ratio
• Working capital turnover ratio
• Fixed assets turnover ratio
• Over and under trading

Long Term Solvency or Leverage Ratios:

Long term solvency or leverage ratios  convey a firm's ability to meet the interest costs and payment schedules of its long term obligations. Following are some of the most important long term solvency or leverage ratios.

• Debt-to-equity ratio
• Proprietary or Equity ratio
• Ratio of fixed assets to shareholders funds
• Ratio of current assets to shareholders funds
• Interest coverage ratio
• Capital gearing ratio
• Over and under capitalization

Financial-Accounting- Ratios Formulas:
A collection of financial ratios formulas which can help you calculate financial ratios in a given problem. 
Limitations of Financial Statement Analysis:
Although financial statement analysis is highly useful tool, it has two limitations. These two limitations involve the comparability of financial data between companies and the need to look beyond ratios.

Financial Statement Analysis:

Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account.

There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, common size percentages, funds analysis, trend analysis, and ratios analysis.

Financial statements are prepared to meet external reporting obligations and also for decision making purposes. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements.

Tools and Techniques of Financial Statement Analysis:

Following are the most important tools and techniques of financial statement analysis:

1. Horizontal and Vertical Analysis
2. Ratios Analysis

1. Horizontal and Vertical Analysis:

Horizontal Analysis or Trend Analysis:

Comparison of two or more year's financial data is known as horizontal analysis, or trend analysis. Horizontal analysis is facilitated by showing changes between years in both dollar and percentage form.

Vertical Analysis:
Vertical analysis is the procedure of preparing and presenting common size statements. Common size statement is one that shows the items appearing on it in percentage form as well as in dollar form. Each item is stated as a percentage of some total of which that item is a part. Key financial changes and trends can be highlighted by the use of common size statements. 

2. Ratios Analysis:

Accounting Ratios Definition, Advantages, Classification and Limitations:

The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply means one number expressed in terms of another. A ratio is a statistical yardstick by means of which relationship between two or various figures can be compared or measured. Ratios can be found out by dividing one number by another number. Ratios show how one number is related to another.

What is Finance?

Webster's New World dictionary defines it as 

    (1.) money resources, income, etc 

    (2.) the science of managing money. 

Used in this context it is a noun.  It can also be used as a verb in which case it is to supply or get money for a project.

Of these I like the definition as the management of money.  Finance is the most encompassing of all business enterprises.  To understand finance you must know about the entire business, indeed the entire economy.  So for a few minutes lets step back and pretend that we never took economics and are new to this earth.

The Financial system (or the economy, your choice) is composed of consumers, manufacturers, distributors.  These groups need money to purchase products and services. One way of looking at Finance is that it is getting the money to purchase these goods and services. 

Many economists assume that households have excess money and corporations need money.   (This is obviously a gross simplification.  At any given point some individuals have excess money to invest where others need to borrow.  The same is true for corporations and other organizations, but the simplified model makes things easier for the moment.)

he purpose of the Financial System is to make sure that the money flows to those who value it the highest (that is those who can put it to the "best" use).
                                        Now
     Corporations                   «                     Households
    (Need money)                   $                   (have money to invest)
Now, these households are not going to just give corporations money.  They will demand their money back at some time in the future and a bit more for the use of their money and risks incurred etc.
                                     Future
     Corporations                   >>                     Households
    (have money)                   $                   (Want money back) 
  

Everything else we study in finance is just looking at this model in more detail.  (Seriously, EVERYTHING!)

Let's make it personal

I remember being asked in second or third grade the key to understanding a book.   My immediate response to put yourself into the book.  The same is true here.   If we take a few seconds now to internalize the subject it will pay large dividends (don't you love finance humor :-)) in the future.

If I ask to borrow money from you what do you say?  Yes?  No?  It depends doesn't it?  What does it depend on?  A million things! For example: how much do I want to borrow, what are the prospects of me being able to repay it, what is my reputation, what am I going to do with the money, whether you have anything better to do with the money....can you think of anything else? 

The same ideas are true in the financial world.  People will not lend, or will require a larger repayment if they do decide to lend, if there are many things to do with their money, or if the borrower is going to do something risky with it, or if the borrower has an unsavory reputation. 

If you get that, you will have fun in finance.  If you do not understand the example, please reread it and imagine people asking you for money.  Oh, come on, please!!!  :-)  

Pakistan Interest Rate

The benchmark interest rate in Pakistan was last reported at 13.00 percent. In Pakistan the interest rates decisions are taken by the State Bank of Pakistan. The official interest rate is the discount rate. ,From 1992 until 2010, Pakistan's average interest rate was 12.78 percent reaching an historical high of 20.00 percent in October of 1996 and a record low of 7.50 percent in November of 2002. This page includes: Pakistan Interest Rate chart, historical data and news.

National Bank of Pakistan

National Bank of Pakistan is the largest commercial bank operating in Pakistan.

It has redefined its role and has moved from a public sector organisation into a modern commercial bank. While it continues to act as trustee of public funds and as the agent to the State Bank of Pakistan (in places where SBP does not have a presence) it has diversified its business portfolio and is today a major lead player in the debt equity market, corporate investment banking, retail and consumer banking, agricultural financing, treasury services and is showing growing interest in promoting and developing the country's small and medium enterprises and at the same time fulfilling its social responsibilities,
 NBP headquarters in Karachi, Pakistan with over 1,200 branches country wide. The bank provides both commercial and public sector banking services. It has assets worth USD 12.293 billion in 2007.
 Its subsidiaries include NBP Capital, NBP Modaraba Management Company, NBP Exchange Company, Taurus Securities, NBP Almaty and others.

International offices

National Bank of Pakistan branch in Washington, D.C.

• NBP also has branches /offices in the USA, Canada, Germany, France, Bahrain, Egypt, Bangladesh, Hong Kong, Japan, South Korea, The People's Republic of China, Afghanistan, Turkmenistan, Kyrgyz Republic, Kazakhstan, Uzbekistan, Azerbaijan and Saudi Arabia.