Prepare an 825-word paper in which you define the purpose of accounting and identify the four basic financial statements. Be sure to explain how they are interrelated with each other, and why they are useful to managers, investors, creditors, and employees.
Accounting deal with different clients these may be private people, the government or a business entity. The major purpose of the accounting is to ensure the accuracy of the financial records of a business, to guarantee that taxes are paid on time to prevent other fraudulent acts that a business might commit regarding its financial conditions. Due to the accounting, one can prepare, analyze and verify a companys financial statements to provide accurate information to those who rely on it. Accounting normally classified as public accounting, management accounting, government accounting, etc.
Different classifications involve different tasks. Public accounting deals with the matters related with auditing and tax consultation services and the professional who related with Public accounting are CPAs.
Management accounting work for a company and its major purpose involve budgeting, performance evaluation, cost management and asset management. In Management accounting, accountants are preparing, analyzing and interpreting financial statements for the use of the company in order to make informed decisions. Finally, government accounting debates over the issues related with government. In government accounting, accountant maintains and examines the financial statements of government agencies and other businesses that are subject to government regulation.
There are mainly four types of information is available in financial statements 1) Profit Loss Statement 2) Balance Sheet 3) Statement of cash flows and 4) Statement of Changes in Equity. All the statements have own importance. Profit Loss Statement debates over the companys revenue generation power, cost behavior and structure and in the end on Net Income. Balance Sheet provides a more clear reflection of any companys performance in recent past. The balance sheet is an ideal starting point for the analysis of any organizations resources and obligations including the liquidity and solvency of the organization. The balance sheet provides an overview regarding the companys financial position. In the same time the balance sheet also discussed about the companys assets, liabilities and owners equity. Balance Sheet are collective and cumulative in nature, as they reflect the effects of all the transactions that took place since the start of the business to the last date accounted for in that financial year. Whereas, income statement focuses more on the cost and profitability.
Cash flow statement discussed over the companys operating activities (review the increase and decrease in current assets and current liabilities), investing activities (review over the sale and purchase of fixed assets) and financing activities (review over issuancepayment of loan, issuancerepurchase of share, dividend paid etc) during the year. It also discussed on the in flow and outflow of the cash and also on the cash equivalents. While the Statement of Changes in Equity assess the companys equity financing which is in the shape of stock and also focuses on the retained earning and dividend section which is the pivotal part of this statement. Facts related with interrelation of four basic financial statements are stated below
Frequently changes in the tax percentages make an impact on the firms net income, dividend, EPS, owners equity, stock price, etc (Besley, Brigham, 2001).
Governments regulation on any appropriate business slight distorts the financial statements of the company (Besley, Brigham, 2001).
Events happening after balance sheet dates like case filed in the court of law make a negative impact on the reported figures of the company (Garrison, 2004).
Fluctuation the interest rate percentage makes an impression on the interest expense of the company and also on the prices of the bonds.
Deciding on where to invest money, i.e. cash management
Deciding on which type of financing to go for, equity financing or debt financing
USEFULNESS TO MANAGERS, INVESTORS, CREDITORS, AND EMPLOYEES
Usefulness for the Managers
Receivable management policies and identifies the firms recovering abilities.
In the inventory section mangers reviewed the inventory management policies like how much inventory is idle, how much is in use, etc.
Current assets and current liabilities also suggest the firms liquidity position and sends signal to the mangers that firm is financial crises or on the edge of financial crunch (Besley, Brigham, 2001).
Usefulness for the Investors
Equity suggests that what is the pay back or adequate return to its share holders.
Dividend measures the ability of a company to pay dividend on preference share, which carry a stated rate of return (Besley, Brigham, 2001).
Dividend yield which expressed as a rate of return on the market price of the stock (Besley, Brigham, 2001).
Usefulness for the Creditors
Section of EBIT and interest expense shows the debt servicing ability and capability of a company and also indicator of a companys ability to meet its interest payment obligations (Besley, Brigham, 2001).
Debt section shows the percentage of total asset financed by debt, from a creditor banks view point, the lower debt ratio gives a positive signal to the creditor.
Usefulness for the Employees
To make day to day operating decisions
To allocate new jobs, i.e. create new job vacancies or lay-off people, depending on whether the company wants to grow or not.
Accounting deal with different clients these may be private people, the government or a business entity. The major purpose of the accounting is to ensure the accuracy of the financial records of a business, to guarantee that taxes are paid on time to prevent other fraudulent acts that a business might commit regarding its financial conditions. Due to the accounting, one can prepare, analyze and verify a companys financial statements to provide accurate information to those who rely on it. Accounting normally classified as public accounting, management accounting, government accounting, etc.
Different classifications involve different tasks. Public accounting deals with the matters related with auditing and tax consultation services and the professional who related with Public accounting are CPAs.
Management accounting work for a company and its major purpose involve budgeting, performance evaluation, cost management and asset management. In Management accounting, accountants are preparing, analyzing and interpreting financial statements for the use of the company in order to make informed decisions. Finally, government accounting debates over the issues related with government. In government accounting, accountant maintains and examines the financial statements of government agencies and other businesses that are subject to government regulation.
There are mainly four types of information is available in financial statements 1) Profit Loss Statement 2) Balance Sheet 3) Statement of cash flows and 4) Statement of Changes in Equity. All the statements have own importance. Profit Loss Statement debates over the companys revenue generation power, cost behavior and structure and in the end on Net Income. Balance Sheet provides a more clear reflection of any companys performance in recent past. The balance sheet is an ideal starting point for the analysis of any organizations resources and obligations including the liquidity and solvency of the organization. The balance sheet provides an overview regarding the companys financial position. In the same time the balance sheet also discussed about the companys assets, liabilities and owners equity. Balance Sheet are collective and cumulative in nature, as they reflect the effects of all the transactions that took place since the start of the business to the last date accounted for in that financial year. Whereas, income statement focuses more on the cost and profitability.
Cash flow statement discussed over the companys operating activities (review the increase and decrease in current assets and current liabilities), investing activities (review over the sale and purchase of fixed assets) and financing activities (review over issuancepayment of loan, issuancerepurchase of share, dividend paid etc) during the year. It also discussed on the in flow and outflow of the cash and also on the cash equivalents. While the Statement of Changes in Equity assess the companys equity financing which is in the shape of stock and also focuses on the retained earning and dividend section which is the pivotal part of this statement. Facts related with interrelation of four basic financial statements are stated below
Frequently changes in the tax percentages make an impact on the firms net income, dividend, EPS, owners equity, stock price, etc (Besley, Brigham, 2001).
Governments regulation on any appropriate business slight distorts the financial statements of the company (Besley, Brigham, 2001).
Events happening after balance sheet dates like case filed in the court of law make a negative impact on the reported figures of the company (Garrison, 2004).
Fluctuation the interest rate percentage makes an impression on the interest expense of the company and also on the prices of the bonds.
Deciding on where to invest money, i.e. cash management
Deciding on which type of financing to go for, equity financing or debt financing
USEFULNESS TO MANAGERS, INVESTORS, CREDITORS, AND EMPLOYEES
Usefulness for the Managers
Receivable management policies and identifies the firms recovering abilities.
In the inventory section mangers reviewed the inventory management policies like how much inventory is idle, how much is in use, etc.
Current assets and current liabilities also suggest the firms liquidity position and sends signal to the mangers that firm is financial crises or on the edge of financial crunch (Besley, Brigham, 2001).
Usefulness for the Investors
Equity suggests that what is the pay back or adequate return to its share holders.
Dividend measures the ability of a company to pay dividend on preference share, which carry a stated rate of return (Besley, Brigham, 2001).
Dividend yield which expressed as a rate of return on the market price of the stock (Besley, Brigham, 2001).
Usefulness for the Creditors
Section of EBIT and interest expense shows the debt servicing ability and capability of a company and also indicator of a companys ability to meet its interest payment obligations (Besley, Brigham, 2001).
Debt section shows the percentage of total asset financed by debt, from a creditor banks view point, the lower debt ratio gives a positive signal to the creditor.
Usefulness for the Employees
To make day to day operating decisions
To allocate new jobs, i.e. create new job vacancies or lay-off people, depending on whether the company wants to grow or not.
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