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Accounting and Financial Statements (Accounting (Accountants are the…
Accounting and Financial Statements
Accounting
the recording, measurement, and interpretation of financial information
Accountants
are the people who prepare accounting information
Certified public accountants (CPAs)
are individuals who have been certified by the state
Private accountants
are employed by corporations, government agencies, and other organizations to prepare their financial statements
Bookkeeping
is more narrow and mechanical than accounting and is typically limited to the routine
Internal Uses
Managerial accounting
the internal use of accounting statements by managers in planning and directing the course of the organization
Cash flow
the movement of money through a business on a daily, weekly, monthly, or yearly basis
A budget
is an internal financial plan that forecasts expenditures and revenues over a set period of time
External Uses
These
financial statements
become the basis for the information provided in a corporation’s official
annual report
, a summary of the firm’s financial information, products, and growth for stockholders and potential investors.
Stockholders use
financial statements
to evaluate the return
on their investment and the overall quality of the firm’s management team
The Accounting Process
Assets
are a firm’s economic resources or items of value that it owns
Liabilities
are debts the firm owes to others
Owners’ equity
is assets minus liabilities and includes all of the funds that have
ever been contributed to the company that never have to be paid back
Accounting equation
: Assets = Liabilities + Owners’ equity
Financial Statements
The physical results of the accounting process are
financial statements
the
income statement
,
the balance sheet
, and
the statement of cash flow
The
income statement
is a financial statement showing the profitability of a firmover a period of time
Expenses
are the costs incurred in the daily operation of a business
Net income
is the profit (or loss) after all expenses, including taxes, have been deducted from revenue
The
balance sheet
presents a “snapshot” of a company’s financial position at a given moment
The
statement of cash flows
explains how the company’s cash changed from the beginning of the accounting period to the end
Ratio analysis
refers to calculations that measure an organization’s financial health, bringing the information from the balance sheet and income statement into sharper
focus.
Profitability ratios
measure how much operating income or net income a firm is able to generate relative to its assets, owners’ equity, and sales