Accounting and Financial Systems

Chapter 14: Accounting and Financial Statements

Purpose of Accounting

  • Provides stakeholders with financial information for informed decision-making.

Types of Accounting

  • Financial Accounting:

    • Focuses on external reporting to stakeholders.

  • Managerial Accounting:

    • Provides internal reports for management decision-making.

  • Forensic Accounting:

    • Involves examining financial records for fraud or legal issues.

Key Financial Statements

  1. Balance Sheet: Shows assets, liabilities, and owner's equity at a specific point in time.

  2. Income Statement: Summarizes revenues and expenses over a period, indicating profit or loss.

  3. Statement of Cash Flows: Details cash inflows and outflows from operating, investing, and financing activities.

Accounting Principles

  • GAAP (Generally Accepted Accounting Principles):

    • Standard framework of guidelines for financial accounting.

Key Terms

  • Assets: Resources owned by a company.

  • Liabilities: Obligations owed to outsiders.

  • Owner's Equity: Owner's claims after liabilities are settled.

  • Revenue: Income from business activities.

  • Expenses: Costs incurred in earning revenues.

Chapter 15: Money and the Financial System

Functions of Money

  1. Medium of Exchange: Accepted for goods and services.

  2. Measure of Value: Standard for pricing goods and services.

  3. Store of Value: Maintains value over time.

Characteristics of Money

  • Acceptability: Widely accepted.

  • Divisibility: Divided into smaller units.

  • Portability: Easy to carry and exchange.

  • Stability: Holds value over time.

  • Durability: Lasts over time without degrading.

Types of Financial Institutions

  • Commercial Banks: Offer full banking services to individuals and businesses.

  • Savings and Loan Associations: Focus on residential mortgages.

  • Credit Unions: Member-owned institutions offering similar services to banks.

  • Mutual Savings Banks: Owned by depositors, focusing on savings and mortgages.

Federal Reserve System (The Fed)

  • Purpose: Regulates the U.S. monetary and financial system.

  • Tools:

    • Reserve Requirements: Minimum reserves each bank must hold.

    • Discount Rate: Interest rate charged to commercial banks.

    • Open Market Operations: Buying/selling government securities to influence money supply.

Electronic Banking

  • EFT (Electronic Funds Transfer): Transfers funds electronically.

  • ATM (Automated Teller Machine): Provides banking services.

  • ACH (Automated Clearing House): Processes large volumes of credit and debit transactions.

Chapter 16: Financial Management and Securities Markets

Financial Management

  • Objective: Maximize firm's value and ensure financial stability.

  • Responsibilities:

    • Cash Flow Management: Monitoring inflows and outflows.

    • Investment Decisions: Allocating resources to projects.

    • Financing Decisions: Determining capital structure.

Working Capital Management

  • Managing short-term assets and liabilities to ensure liquidity.

Sources of Financing

  • Short-Term:

    • Trade Credit: Buying goods/services now, paying later.

    • Bank Loans: Borrowing funds from banks.

    • Commercial Paper: Unsecured, short-term debt instruments.

  • Long-Term:

    • Equity Financing: Raising capital through selling shares.

    • Debt Financing: Borrowing funds to be repaid over time.

Securities Markets

  • Primary Market: New securities are issued.

  • Secondary Market: Existing securities are traded among investors.

Major Stock Exchanges

  • New York Stock Exchange (NYSE)

  • NASDAQ

Investment Terms

  • Bonds: Debt investments where an investor loans money to an entity.

  • Stocks: Securities representing ownership in a company.

  • Mutual Funds: Investment programs funded by shareholders.

  • ETFs (Exchange-Traded Funds): Marketable securities tracking an index.

Study Tips

  • Familiarize yourself with key terms and their definitions.

  • Understand the functions and characteristics of money.

  • Review the roles of different financial institutions and the Federal Reserve.

  • Practice interpreting financial statements.

  • Understand the differences between various financing options.