Chapter 1 - Chapter 1 Notes Uses of Accounting Information...

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Chapter 1 Author: Anna Rovira Beavers Needles 2008 8/15/08 1 Financial Accounting Chapter 1 Notes Uses of Accounting Information and the Financial Statements I. Accounting as an Information System Definition of Accounting: Accounting is an information system that measures, process, and communicates financial information about an identifiable economic entity. A. Business Goals, Activities and Performance Measures A business is an economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners. Business Goals: To take enough money from customers to pay all the cost of doing business and have enough left over as profit for the owners. Profitability: The need to earn enough income to attract and hold investments capital. Liquidity: Having enough cash available to pay debts when they are due. B. Business activities: Financial Activities: May include obtaining capital, repaying creditors. Investing Activities: Spend the money received in ways that are productive to the business, such as: buying a parcel of land, building, equipment, etc. Operating Activities: Day to day operations such as buying a selling a product or services, hiring workers, buying merchandise. C. Performance Measures: An important function of accounting provide with data, financial statements, that indicates if management are achieving their goals. II. Difference between Financial Accounting and Managerial Accounting: Financial Accounting: Measures the day-to-day operations. Generates reports that are communicated internally (management) as well as externally (Internal Revenue Service (IRS), Securities Exchange Commission, (SEC), vendors, investors, etc.) for the purpose of evaluating how the company is doing. Managerial Accounting: Provides reports for internal decision makers. Such as, how many units of a product should be produced? What is the best location to produce certain products?. What should be the product mix based on the resources available to the company?
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