Financial Statements and Business Decisions

The Players

• investors
• creditors
• managers

Understanding the Business

• Purchaser materials and labour
• Manufacture product
• Sell products to customers
• Collect cash from customers and pay creditors

Business owners (called investors or shareholders) look for two sources of possible gain:

• Sell ownership interest in the future for more than they paid.
• Receive a portion of the company’s earnings in cash (dividends).

Creditors lend money to a company for a specific length of time and gain by charging interest on the money loaned.

• Creditors lend money to a company for a specific length of time and gain by charging interest on the money loaned.

Manufacturers either make the parts needed to produce its products or buy the parts from suppliers.

The Accounting System

• Collects and processes financial information
• Reports information to decision makers
• Managers (internal decision makers) Investors and Creditors (external decisionmakers)

Untitled Slide

• Financial Accounting Reports: Periodic financial statements and related disclosures FOR External Decision Makers Investors, creditors, suppliers, customers, etc.
• Managerial Accounting Reports : Detailed plans and continuous performance reports FOR Internal Decision Makers Managers throughout the organization

To reflect the $ effects of transaction

• CASH
• inventory
• Equipment
• accounts payable
• accounts receivable etc.

When studying financial statements you should focus on:

• elements: ASSETS Liabilities, Equity, revenues, expenses
• time period/date
• Relationship of elements
• why each element is important to users