Uses of Accounting Information and the
0REVIEWING THE CHAPTER
Objective 1: Define
and describe its role in making informed decisions, identify
business goals and activities, and explain the importance of ethics in accounting.
is an information system that measures, processes, and communicates financial
information about an identifiable economic entity. It provides information that is essential
for decision making.
is an economic unit that sells goods and services at prices that will provide an
adequate return to its owners. To survive, a business must meet two goals:
which means earning enough income to attract and hold investment capital, and
which means keeping sufficient cash on hand to pay debts as they fall due.
Businesses pursue their goals by engaging in operating, investing, and financing activities.0
are the everyday activities needed to run the business, such as
hiring personnel; buying, producing, and selling goods or services; and paying taxes.
spend the funds raised. They include such activities as buying and
selling land, buildings, and equipment.
are needed to obtain funding for the business. They include such
activities as obtaining capital from owners and creditors, paying a return to owners,
and repaying creditors.
indicate the extent to which managers are meeting their business
goals and whether the business activities are well managed. Performance measures thus
often serve as the basis for evaluating managers. Examples of performance measures
include cash flow (for liquidity), net income or loss (for profitability), and the ratio of
expenses to revenue (for operating activities).
A distinction is usually made between
which focuses on
information for internal users, and
which involves generating and
communicating accounting information in the form of
outside the organization.
Accounting information is processed by bookkeeping, computers, and management
information systems. 0
A small but important part of accounting,
is the mechanical and
repetitive process of recording financial transactions and keeping financial records.
is an electronic tool that rapidly collects, organizes, and communicates
vast amounts of information. The computer does not take the place of the accountant,
but the accountant must understand how the computer operates because it is an
integral part of the accounting information system.