Introduction To Finance And Accounting
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Identify the audiences, purposes, and natures of financial statements and managerial reports.
Most business owners have a general knowledge of what accountants do. They capture information and events about a business, and summarize that activity in reports used by persons interested in the entity. In this paper, we will discuss briefly the purpose, nature and use of accounting reports without which financial managers, investors and bankers would be flying blind. Business managers need accounting information to make sound leadership decisions. Investors hold out hope for profits that may eventually lead to distributions from the business (e.g., “dividends”). Creditors are always concerned about the entitys ability to repay its obligations. Governmental units need information to tax and regulate. Analysts use accounting data to form their opinions on which they base their investment recommendations. Employees want to work for successful companies to further their individual careers, and they often have bonuses or options tied to enterprise performance.
The income statement, the balance sheet and the statement of cash flows are three basic types of financial statements. The income statement is a summary of an entitys results of operation for a specified period of time. It provides information about revenues generated and expenses incurred. The difference between revenues and expenses is defined as net income or net loss. Small business owners use these statements to find out what areas of their business are over budget or under budget. Specific items that are causing unexpected expenditures can be pinpointed, such as phone, fax, mail, or supply expenses. Income statements can also track dramatic increases in product returns or cost of goods sold as a percentage of sales.
A short supplemental to the income statement is a statement of retained earnings, which succinctly report the changes to retained earnings from one period to the next.
The balance sheet focuses on the accounting equation Assets = Liabilities + Owners equity, by revealing the economic resources owned by an entity and by the claims against those resources (liabilities and owners equity). The balance sheet is a view of the firm at a point in time. The statement of cash flows details the enterprises cash flows. Cash flow represents cash or cash equivalent items that can easily be converted into cash within 90 days.
The use of financial accounting information in making informed and ethical business decisions
Managers use financial accounting information in making informed decisions in their goal of maximizing the shareholders wealth. The relationship between economics, which provides a structure for decision-making and accounting, which provides data to help weigh and evaluate the operating performance of the firm by the use of ratios and other indicators, must be well understood by the financial manager. A company with a 50%