Ch 1: Intro to Financial Statements

Accounting

is the preparation of financial information (backward facing)

Finance

is the decision-making that stems from the work of accounting (forward facing)

financial statements

When done properly, this results in: Timely preparation, accuracy, comparability, usability

Internal Users of financial statements

These are people, generalized as managers, who work for a business

External Users of financial statements

Investors / Shareholders / Owners / Creditors / Lenders / Banks/ Regulators

Generally Accepted Accounting Principles (GAAP)

U.S. based standards to ensure that the valuation, treatment, and measurements of typical accounting situations are standardized

Sarbanes-Oxley Act (SOX)

Top management must certify the accuracy of financial statements, Penalties for fraudulent financial statements are more severe, with added financial penalties and jail time, Outside auditors must possess more independence from the companies they audit

ethical behavior in financial reporting

Bad news could lead to:

• Layoffs

• Lower compensation for certain managers

• Falling stock prices (and for managers with stock options or other stock-based compensation, lower pay)

• Pressure/stress from higher-up management

Three Types of Business Activities

Financing Activities, Operating Activities, Investing Activities

Financing Activities

Acquiring money through other parties that are not associated with buying/selling your goods/services; Loans from banks, investors

Debt Financing

acquiring money via borrowing

Equity Financing

or acquiring money via selling ownership

Investing Activities

Purchasing equipment (trucks, machinery), New buildings, Expanding operations, Think of these actions as those that help the capacity of business to perform

Operating Activities

These are actions that are directly associated with the core/main business

Debt Financing

has claims to assets of the business; claims to the assets of a business are expressed as liabilities

Notes Payable

An agreement/schedule to repay a loan to an institution like a bank

Bonds Payable

An agreement to return the value of bonds sold to investors

payables

common term to define liabilities

Investing Activities

Assets can be perceived as anything a business owns that possess some financial worth in a sale (PPE, property, plant, equipment)

Operating Activities

Operating activities are how a business uses their assets to create revenues

Cost of Goods Sold, or COGS

Inventory that is used to create goods