Reading Notes from Dianne.docx - Chapter 1 Introducing...

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Chapter 1: Introducing Financial Accounting Accounting is the process of identifying, measuring, and communicating financial information to help people make economic decisions. Demand for Accounting Information Two types of accounting: 1. Financial accounting - looking at the company from the outside 2. Managerial accounting - looking at the company from the inside Who uses financial accounting information? 1. Shareholders and Potential Shareholders a. Corporation - managed by a large group who is not involved in the day-to-day operations i. Owners buy shares of stock and thus become shareholders b. Sole Proprietorship - one guy runs the show c. Partnership - couple of owners d. Financial statements give insight for publicly traded companies and allow potential shareholders to assess risk before buying in 2. Creditors and Suppliers a. Creditors - banks or other lenders who are interested in company’s ability to pay back b. Suppliers - use financial data to determine credit sales for supply-chain analysis and expansion of their businesses 3. Managers and Directors a. Managers and directors are compensated for performance based off financial analysis and industry standards b. A board of directors is hired to represent shareholders interests - and they hire executive team 4. Financial Analysts a. Assess risk, forecast performance, establish prices for new issues of stock, make buy-or-sell recommendations 5. Other Users of Financial Accounting Information a. Prospective employees b. Labor unions c. Customers d. Government agencies Costs and Benefits of Disclosure Disclosure - the act of providing financial information to external users Benefits 1. Lowers financing and operating costs - banks can see the data and give a lower interest rate Costs 1. Hiring the team to do financial accounting 2. Showing too much of the business can lead to competitive disadvantage - they can see pricing, what is profitable - and steal those idea 3. Raise investors expectations for profitability 4. Political costs - highly visible companies are subject to tax hikes and scrutiny Business Activities Businesses plan activities → finance the activities → invest resources in those activities → engage in operating activities. Companies conduct these activities while confronting → competition, regulation, customer preferences, and economic conditions
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Planning Activities Planning activities - goals and strategies adopted Strategy - how to achieve its goals Investing Activities Methods to acquire assets Assets : provide future benefit for company Financing Activities Funding investments 1. Equity financing - funds from owners/company ex. Selling stock 2. Creditor financing - funds from non-owners - created liabilities Liabilities : obligations the company must repay in the future ex. Bank loans Investing = Creditor Financing + Owner Financing (Accounting Equation) Assets = Liabilities + Equities Operating Activities The production, promotion, and selling of a company’s goods and services.
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