Foundation acctg concepts - RESTRICTED FOR WRITERS USE ONLY...

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RESTRICTED FOR WRITER’S USE ONLY (foundation acctg concepts: p. 1/4) May 2004 S OME F OUNDATION A CCOUNTING C ONCEPTS * I NTRODUCTION Accounting is a communication system that aims to provide information about the financial performance of an entity. “Performance” presumes some objective or goal. The entity’s objective is to maximize its value, a goal that is equivalent to creating maximum happiness/satisfaction for the entity owner(s). The profit-motivated owner’s happiness is financial wealth. 1 In these Notes, the owners are presumed to be after maximum financial gain upon disposal of the entity’s ownership. In turn, financial wealth is the result of undertaking business procedures categorized into investing, financing, and operating activi- ties. For example, to Jollibee Food Corporation, investing activities can include acquiring things like cooking equipment, uncooked beef, potatoes, wrapping paper, disposable cups, tables and chairs. (These investments require tying up money, a process that creates capacity-to-operate-the-business.) On another hand, Jollibee’s financing activities are those that raise funds like asking Jollibee’s owners to infuse capital into the enterprise, or borrowing from lenders. (Fund-raising constitutes the financing activi- ties that result in having the ability to invest.) 1 Others are made happy by maximizing social or cultural well-being, whose attainment eludes easy indication through financial terms. Finally, Jollibee, among other activities, pro- duces beef patties or otherwise processes basic materials into the firm’s sellable forms, advertises and promotes its products, and sells products. These activities end up with Jollibee generating revenues. (Such manu- facturing, selling and, in general, “doing business,” constitute the operating activities that convert the investments back to cash form. Note that such conversion releases funds previously tied up in investments.) In pursuing the wealth objective, the busi- nessman undertakes financing, investing and operating activities. Another way of seeing these functions is: financing raises money, investing converts money into assets, and oper- ating re-converts assets to money as a way of going for profit. Alternatively, financing leads to funds availability, investing creates operating capacity, and operating releases funds from asset investments (plus some more, usually called “profit”). The following are important concepts: (1) The three activity categories are parts of a continuing cycle to pursue “wealth gen- eration,” making them inseparable and interdependent in that wealth-making context. (2) Accounting summarizes investing and financing activities into the balance sheet, and the operating activities into the income statement. Accordingly, these two accounting reports are also inseparable and inter-dependent when assessing wealth generation. Obviously, the ability
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