BUS103: Introduction to Financial Accounting

Companies that require funds to maintain existing operations and expand new operations frequently do not have the necessary cash available within the company. Therefore, these companies are required to obtain long-term financing from banks and other financial institutions. The operations of financial institutions are unique from those of the typical manufacturing or service company. As a result, the accounting measurement and disclosure practices followed by financial institutions can be quite different from those followed in other industries. In addition to the more traditional careers in accounting (auditing, professional services, financial reporting, cost accounting, and taxation), accounting majors with interests in finance may pursue a career in financial institutions.

Accountants in this industry commonly deal with issues related to marketable securities, derivatives, hedging, sale of receivables, foreign currency exchanges, and loan loss provisions and impairments. In addition, accountants in this area are being called upon to play an increasing role in the strategic operations of the financial institution. Not only are accountants needed to account for the institution's transactions, but they are being asked to recommend new opportunities for growth and to advise on financial risk as well. Some of these new areas include issues related to asset/liability management, interest rate risk, present value measurements, capital structure, and key ratio analysis.

Accountants also play a key role in one of the most important decisions of a financial institution - the decision of whether to lend money to a prospective borrower. The decision to lend money hinges on the ability of the prospective borrower to pay interest and repay debt. Since accountants have been trained in financial statement preparation and interpretation, accountants are some of the most sought after professionals for understanding the financial position and risk of a prospective borrower.

In previous chapters, you learned that corporations obtain cash for recurring business operations from stock issuances, profitable operations, and short-term borrowing (current liabilities). However, when situations arise that require large amounts of cash, such as the purchase of a building, corporations also raise cash from long-term borrowing, that is, by issuing bonds. The issuing of bonds results in a Bonds Payable account.