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CHAPTER 1 INTRODUCING FINANCIAL ACCOUNTING Demand for Accounting Information Accounting the process of recording, summarizing, and analyzing financial transactions. Two categories: o Financial accounting designed primarily for decision makers outside of the company Includes information about company profitability & financial health Investors, employees, customers, and governments o Managerial accounting designed primarily for decision makers within the company Not reported outside of the company Includes information about profitability of specific products, divisions, or customers Lets managers decide whether to add/drop products or continue serving different types of customers Who Uses Financial Accounting Information? (Potential) shareholders Creditors and suppliers Managers and directors Financial analysts Other users Shareholders and Potential Shareholders Corporation a form of business organization that is characterized by a large number of owners who are not involved in managing the day-to-day operations of the company o It exists as a legal entity that issues shares of stock in exchange for cash o Therefore, the owners of a corporation are referred to as shareholders or stockholders Sole proprietorship has single owner who typically manages the daily operations Partnership has two or more owners who are usually involved in managing the business NYSE/NASDAQ organized exchanges Corporations with stock traded on public exchanges are known as publicly traded corporations // public corporations *Financial statements + footnotes info on risk/return for owning a corporation s shares of stock & reveal how well management has performed o Also provide insights into future performance by revealing management s plans for new products, operating procedures, and strategic directions o ^^ increases market price of its shares & helps the company raise funds Creditors and Suppliers
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Creditors banks or other lenders Need financial information to help determine loan terms, loan amounts, interest rates, and collateral Loans often include contractual requirements based on fin. st. Suppliers use financial information to establish credit sales terms and to determine their long- term commitment to supply-chain relations Managers and Directors Incentive compensation, cash bonuses, stock options, etc. are linked directly to information in financial statements Board of directors elected by the shareholders to represent shareholder interests and oversee management Financial Analysts Moody s a credit rating agency to help decision makers efficiently/effectively analyze financial statements Other Users of Financial Accounting Information Prospective employees to learn about a company before interviewing for / accepting a new job Labor unions to assess the financial health of a firm prior to negotiating labor contracts on
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