Accounting Is the Financial Information System
Accounting is the financial information system that provides these insights. In short, to understand your organization, you have to know the numbers. Accounting consists of three basic activities”it identifies, records, and communicates the economic events of an organization to interested users. You cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or dispensing financial information. Good decision making depends on good information.
A vital element in communicating economic events is the accountant’s ability to nalyze and interpret the reported information. Analysis involves use of ratios, percentages, graphs, and charts to highlight significant financial trends and relationships. Interpretation involves explaining the uses, meaning, and limitations of reported data. In total, accounting involves the entire process of identifying, recording, and communicating economic events. 2 Investors (owners) use accounting information to make decisions to buy, hold, or sell stock.
Accounting Is the Financial Information System Essay Example
Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money. The retained earnings (earned capital) section of the balance sheet is determined by three items: revenues, expenses, and dividends. An income statement presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time. 2. A retained earnings statement summarizes the changes in retained earnings for a specific period of time. 3. A balance sheet reports the assets, liabilities, and stockholders’ equity of a company at a specific date. . A statement of cash flows summarizes information concerning the cash inflows receipts) and outflows (payments) for a specific period of time. Each statement provides relevant financial data for internal and external users The income statement reports the success or profitability of the company’s operations over a specific period of time. The income statement lists revenues first, followed by expenses. Finally, the statement shows net income (or net loss). When revenues exceed expenses, net The retained earnings ending balance is the final amount on the statement.
The information provided by this statement indicates the reasons why retained earnings increased or decreased during the eriod. If there is a net loss, it is deducted with dividends in the retained earnings statement. Balance Sheet Observe that the balance sheet lists assets at the top, followed by liabilities and stockholders’ equity. Total assets must equal total liabilities and stockholders’ equity. Statement of Cash Flows The statement of cash flows provides information on the cash receipts and payments for a specific period of time.
The statement of cash flows reports (1) the cash effects of a company’s operations during a period, (2) its investing transactions, (3) its financing ransactions, (4) the net increase or decrease in cash during the period, and (5) the cash amount at the end of the period. Reporting the sources, uses, and change in cash is useful because investors, creditors, and others want to know what is happening to a company’s most liquid resource. The statement of cash flows provides answers to the following simple but important questions. 1 . Where did cash come from during the period? . What was cash used for during the period? 3. What was the change in the cash balance during the period? 2 Identify the users and uses of accounting. The major users and uses of accounting are: (a) Management uses accounting information in planning, controlling, and evaluating business operations. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information.
Other groups that use accounting information are taxing authorities, regulatory agencies, customers, labor unions, and economic planners. 8 Understand the four financial statements and how hey are prepared. An income statement presents the revenues and expenses of a company for a specified period of time. A retained earnings statement summarizes the changes in retained earnings that have occurred for a specific period of time. A balance sheet reports the assets, liabilities, and stockholders’ equity of a business at a specific date.
A statement of cash flows summarizes information for a specific period of time Describe the basic objectives of financial reporting. The basic objectives of financial reporting are to provide information that is (1) useful to those making investment nd credit decisions; (2) helpful in assessing future cash flows; and (3) helpful in identifying economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims Discuss the qualitative characteristics of accounting information and elements of financial statements.
To be Judged useful, information should possess the following qualitative characteristics: relevance, reliability, comparability, and consistency. The elements of financial statements are a set of definitions that can be used to describe the basic terms used in accounting.