FINANCE AND ACCOUNTING SYSTEM Accounting must be understood as a system of information that measures the activity of a firm and processes this information in such a way that it is easily communicated to and understood by the final users. It must allow these users to make value judgements about the financial situation of firms and organizations and also about their activity in order to make informed decisions regarding their future. The basic role of accounting is the transformation of objectively relevant information regarding the financial analysis of a firm into understandable statements that transmit the economic performance of a firm and its consequent financial situation. Users of accounting information Accounting information is useful for many different agents that need to know the financial and economic situation of a firm. These agents can be: - Internal: are those that are part of the firm and whose decisions affect the running of the firm. This includes the board of directors, the executive committee, the CEO, management and the people who work for the firm. - External: are agents that are not active participants in the running of the firm, but are affected by the decisions its makes. We can differentiate between: -- The stakeholders of a firm are agents who are interested in the running of the firm because the decisions they make are directly affected by the success of the firm. The most important stakeholders of a firm are its shareholders and potential shareholders and also include its creditors, employees, suppliers, clients, the government, the competition. -- Any other person who is interested in analyzing the accounting information to find out about a firm, such as professors, researchers or undergraduate students. Financial Statements All firms must present the five following financial statements: - Balance Sheet: Reports the financial position of a firm in a given moment. - Income Statement: Reports the income of a firm during a given period, separating operating income from financial income. - Cash flow Statement: Reports the source and use of the liquid cash of a firm. It is separated in operating, financial and investment cash flows. - Shareholder’s equity statement: Reports all of the changes in the shareholder’s equity of a firm during a determined period. - Disclosure: Reports the criteria, principles and rules that have been followed to create the balance sheet and the income statement. It also provides other important information regarding the firm that is needed to better analyze and understand the other financial statements.