BA 256 Chapter 1 class notes

Accounting: Tools for Business Decision Making

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BA 256 Chapter 1 I. Accounting is the information system that identifies, records, and communicates the economic events of an organization to interested users. The purpose of financial information is to provide inputs for decision making. The users of financial information fall into two groups-- internal users and external users . Internal users - users within the organization. Internal users and questions they may ask: Marketing What price will maximize the company’s net income? Human Resources Can we afford to give employees pay raises this year? Finance Is cash sufficient to pay dividends to stockholders? Management Which product line is most profitable? What should be eliminated? External users - users who are outside the organization. External users and questions they may ask: Investors (current and potential) Is the company earning satisfactory income? How does the company compare in size and profitability with competitors? Creditors (suppliers and bankers) Will the company be able to pay its debts as they come due? IRS, SEC, FTC, labor unions, customers Is the company complying with rules and regulations? Is the company properly paying its taxes? 1
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Accounting helps users assess and manage risk. 1. Risk is the uncertainty about outcomes. 2. More risk = More uncertainty = greater potential for higher returns (and expectations of higher returns by investors and creditors). Ethics in financial reporting In 2002, Congress passed the Sarbanes-Oxley Act (SOX) to try to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals. See page A-22 in Appendix A for required Management’s Report Effective financial reporting depends on sound ethical behavior. Steps for solving ethical dilemmas: 1. Recognize an ethical situation and the ethical issues involved.
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