Chapter 1: Uses of accounting information and the financial statements
Accounting as an information system
Accounting an information system that measures, processes, and communicates financial information about an economic entity. Accounting is the link between business activities and decision makers.
Data about business activities are the input to the accounting system. The output is the useful information for decision makers.
Business goals, activities, and performance measures
Business an economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners.
2 major goals of all businesses: 1. Profitability the ability to earn enough income to attract and hold investment capital. 2. Liquidity the ability to have enough cash to pay debts when they are due.
All businesses pursue their goals by: * Operating activities: * - selling good / services to customers. * Employing managers / workers. * Buying / producing goods / services. * Paying taxes. * Investing activities: * Spending the capital a company receives in a way that will help achieve its objects. (buying land, buildings, equipment etc.). * Financing activities: * - obtaining adequate funds / capital. * Begin operations / continue operating. * Obtaining capital from creditors. * Repaying creditors. * Paying a return to the owners.
An important function of accounting is to provide performance measures indicates whether managers are achieving their business goals and whether the business activities are well managed.
Financial analysis = the evaluation and interpretation of financial statements and related performance measures.
