LO1-4 Making Decisions with Accounting Information

What is the main role of financial accounting in decision‑making?

To provide information useful for investment and lending decisions.

Why does financial accounting matter in a free‑enterprise economy?

It helps allocate resources to companies that use them most efficiently

What are capital markets?

The combined group of investors and creditors who provide funds to businesses.

Why do successful companies attract investors and creditors?

Because they use resources efficiently and generate profit.

What happens to companies that are unprofitable?

Investors won’t invest, creditors won’t lend, and the company may fail.

How do investors and creditors identify successful vs. unsuccessful companies?

By using financial accounting information.

How does financial accounting help managers?

It helps them understand operations and run the company more effectively.

What is financial accounting often described as?

A language that communicates a company’s financial story.

What is the KEY POINT of this section?

Financial accounting provides information useful for investment and lending decisions.

What single piece of information best explains stock price performance?

Net income (the bottom line of the income statement).

Why does net income matter to investors?

Rising net income usually leads to rising stock prices.

What happens if you invest in companies with decreasing net income?

$1,000 shrinks to about $400 over 10 years.

What happens if you invest in companies with increasing net income?

$1,000 grows to about $2,800 over 10 years.

What does Illustration 1–11 show?

Predicting changes in net income helps predict changes in stock prices.

What is data analytics?

Analyzing data to help improve decision‑making.

How has data analytics changed accounting?

It makes reports more accurate, timely, and easier to interpret.

What can data analytics help identify?

Historical trends and more accurate predictions of future performance.

Why do investors and creditors watch a company’s debt level?

High debt limits flexibility and increases the risk of bankruptcy

What is “overhanging debt”?

Debt that restricts management’s ability to pursue new opportunities

What happens if a company cannot repay debt or interest?

Creditors may force the company into bankruptcy

What is the KEY POINT about debt?

Debt level indicates management’s ability to respond to business situations and the risk of financial failure