Principles of Accounting CHAPTER 1: Uses of Accounting Information and the Financial Statements Accounting as an Information System Accounting is an information system that measures, processes, and communicates financial information about an economic entity. It provides the information necessary to make reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities. Business Goals, Activities, and Performance Measures A business is an economic entity that engages in operating, investing, and financing activities to achieve the goals of profitability and liquidity. Users of accounting information focus on a company’s profitability and liquidity . Thus, more than one measure of performance is of interest to them. For example, lenders are concerned primarily with cash flow, and owners are concerned with earnings and withdrawals. An important function of accounting is to provide performance measures, which indicate whether managers are achieving their business goals and whether the business activities are well managed . The evaluation and interpretation of financial statements and related performance measures is called financial analysis. For financial analysis to be useful, performance measures must be well aligned with the two major goals of business — profitability and liquidity. The two major goals of all businesses are profitability and liquidity: 1. Profitability is the ability to earn enough income to attract and hold investment capital . 2. Liquidity is the ability to have enough cash to pay debts when they are due. All businesses pursue their goals by engaging in operating, investing, and financing activities. I. Operating activities include selling goods and services to customers, employing managers and workers, buying and producing goods and services, and paying taxes. II. Investing activities involve spending the capital a company receives in productive ways that will help it achieve its objectives . These activities include buying land , buildings, equipment, and other resources that are needed to operate the business and selling them when they are no longer needed . III. Financing activities involve obtaining adequate funds , or capital , to begin operations and to continue operating . These activities include obtaining capital from creditors, such as banks and suppliers, and from owners. They also include repaying creditors and paying a return to the owners. Financial and Management Accounting Management accounting provides internal decision makers , who are charged with achieving the goals of profitability and liquidity, with information about operating, investing, and financing activities. Managers and employees who conduct the activities of the business need information that tells them how they have done in the past and what they can expect in the future.
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