how much to borrow-Financial Accounting Reports (Financial Statements):oPrepared periodically to provide information to people not employed by the businessoThese external financial statement users aren’t given access to detailed internal records of the company, so they rely extensively on the financial statements.o4 main groups of external users are (1) creditors, (2) investors, (3) directors, and (4) government.1.Creditors:Suppliers, banks, and anyone to whom money is owed.Suppliers want to be sure they will be paid for the goods and services they deliver, so they will evaluate a company’s financial statements and check its credit history before allowing it to buy on credit.Banks use financial statements to evaluate the risk they will not be repaid the money they’ve loaned to a company. They want periodicfinancial reports2.Investors:Existing and potential stockholdersStockholders look to accounting information to assess the financialstrength of a business and, ultimately, to estimate its value3.Directors:Short title for the members of a company’s “board of directors.”The stockholders of public companies or large private companies elect directors to oversee the company’s managers. 4.Government:Look closely at companies’ financial statementsThe Securities and Exchange Commission (SEC): functioning of stock marketsThe Internal Revenue Service (IRS): ensure taxes are computed using correct amounts
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THE BASIC ACCOUNTING EQUATION-What a company owns must equal what a company owes to its creditors and stockholders.-Assets = Liabilities + Stockholders’ Equity-Assets: oAn economic resource presently controlled by the companyoHas measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the futureoCash, supplies, equipment, and softwareoNike and Target have an asset called inventory, which consists of merchandise held for sale-Liabilities:oMeasurable amounts the company owes to creditorsoNote Payable: borrowing from a bankoAccount Payable: borrowing on credit from another companyoSalaries and Wages Payable: owes salaries and wages to employeesoTaxes Payable: owes taxes to governmentsoIf a company goes out of business, liabilities must be paid before any amounts arepaid to stockholders-Stockholders’ Equity:oRepresent the owners’ claims on the business.
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