Overview of Accounting

Overview of Accounting Paper

3/3/08

University of Phoenix

Overview of Accounting Paper

Accounting is sometimes said to be the language of finance because it provides financial data through income statements, balance sheets, and the statement of cash flows (Block & Hirt, 2005). The purpose of this paper is to provide basic information on accounting and finance to the small business owner. By providing the small business owner with the basics of finance and accounting, enables the company to understand the relationships between these fields and apply the concepts to their own company. The field of finance is closely related to economics and accounting, and financial managers need to understand the relationships between these fields (block & Hirt, 2005). Economics provides a structure for decision making in such areas as risk analysis, pricing theory through supply and demand relationships, comparative return analysis, and many other important areas. This paper will identify the audiences, purposes, and natures of financial statements and managerial reports and explain the use of financial accounting information in making informed and ethical business decisions.

Identify the audiences, purposes, and natures of financial statements and managerial reports.

Financial statements are formal records of a business' financial activities. These statements provide an overview of a business' financial condition in both short and long term. The four types of financial staements are:

1. Balance sheet: is a statement that details the financial position or condition of a company, reports on a company's assets, liabilities and net equity as of a given point in time. The income statement and balance sheet used together, will anwer questions like: How much did the company make or lose, and what is a measure of its worth? (Block& Hirt 2005)

2. Income statement: is the profit or loss statement, and reports on a company's results of operations over a period of time. This statement is presented in a stair step fashion so profits or losses can be deducted after each expense is recorded. The ncome statement and balance sheet uses the accrual method of accounting. This means revenues and expenses are only recognized as they occur rather than when the cash exchanges hands.

3. Statement of retained earnings: explains the changes in a company's retained earnings over the reporting period.

4. Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities. “The purpose of this statement is to emphasize the critical nature of cash flow to the operations of the firm. According to accountants, cash flow represents cash or cash equivalent items that can easily be converted inot cash within 90 days” (Bock &Hirt, chap 2, pg. 8). Cash flow statements are divided into three primary sections which are cash flows from operating, investing and financing activities. Operating activities include the generation and expenditure of funds in normal operations. Investing activities include the sale and purchase of plant and equipment and liquidation of long term investment. Financing activites include the sale of bonds, stocks, and other securitiies. Financing activies also covers the repurchase of these same stocks and bonds, and payment of cash dividends.

"The objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently." These statements are used many individuals. Both inside and outside of the compnay.

The internal parties who would use these satements are owners, managers, employees, and other vested individuals. The external parties include are potential investors, banks, government agencies and other parties who are outside the business but need financial information about the business for a diverse number of reasons.

According to Wipedia encyclopedia, financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly