Chapter 1-3 Classes 1-6 9/4 Role of Accounting Ch 1 Efficiently Allocating Capital ● Capital (Savings) ○ Areas to put money in ■ Bank ● Safety and convenience ● Incur interest but very low ● Facilitate transactions ● However, inflation is greater than the interest value, slowly decreases value of money ● Businesses (Ideas, assets, and processes) ○ Invest in brand and get brand well known ○ How to achieve dreams ■ Investors ● Takes money to make money ■ Savers are sitting on money that is decreasing in value so you would like to put the money into good investments ● Would ask for financial statements ○ Performance ■ Income statement ○ Financial position ■ Representation of current resources and obligations ● However, business owners have incentives to show better performance than reality ○ Need to see accuracy of these financial statements ○ Security Exchange Commission (SEC) created standard guidelines for how to prepare financial statements that are in compliance with the rules and guidelines (follow the target for accuracy) ○ Auditors ■ Oversee the preparation of these financial statements ■ Benefits each other if product does well and makes a lot of money ■ Ideal world, business is successful, creates returns and creates more savings
● Capital -> investments ->businesses -> returns -> to beginning again ● In the middle of everything that facilitate efficient capital allocation ○ Effective accounting institutions ○ Regulations ○ Practices ● Prior to the faith in the financial statements, everyone got money from friends and family. Much harder to grow business from a small group of investors. Possibilities are so much greater now ● Beneficiaries ○ Accounting firms that work the SEC ○ Investors who get money back ○ Business owners who get the money to grow their business ○ Consumers with more diverse products ○ Government can tax ○ Employees because more jobs are created What is Accounting? ● Information system ○ Measures business activities ○ Processes data into financial statements ○ Communicates results to decision makers ● Objective ○ To provide financial information about the reporting entity that existing and potential investors, lenders and other creditors can use to make decisions ○ Attempts to reflect business economics in a manner that is useful to decision makers ○ Financial statements reflects measurements of firm position and performance ○ Promotes appropriate resource allocation by firms and capital markets ● Who uses accounting information? ○ Types of firms ■ For-profit ● Partnerships, corporations, etc ■ Non-profit ■ Government entities ○ Outside of the firm ■ Owners (equity investors)/ creditors ■ Potential owners and creditors ■ Consultants ■ Competitors ■ Industry associations ■ Industry analysts
■ Auditors ■ Government agencies to regulate private sectors ■ General public ○ Inside firm ■ Board of directors (representing owners and evaluating senior management) ■ Management ● Senior ● Profit center ● Cost center ● Anyone who manages a budget ■ Controlling functions ● Accountants ■
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