Chapter 5: Using Accounting Information
Definition of Accounting is the process of systematically collecting, analyzing, and report financial
information.
Examples of Financial Information
*How much profit did a business earn last year?
*How much tax did a business pay?
*How much cash does a business have to pay lenders?
Who Use Accounting Information
*Management and employees
*Lenders and suppliers
*Stockholders and investors
*Government agencies
Different Types of Accounting
-Managerial Accounting
*To provides managers and employees within the organization with information needed.
*To make decisions about a firm’s financing, investing, marketing, and operating activities.
-Financial Accounting
*Generates financial statements and reports for interested people outside an organization.
Accounting (Financial) Reports
*Balance Sheet – A summary of the dollar amounts of a firm’s asset, liabilities, and owner’s equity.
*Income Statement – A summary of a firm’s revenues and expense during a specified accounting period.
*Cash Flow Statement – A report of the cash generated and used during the specified time interval.
Financial Ratio
Numbers that show the relationship between two elements of a firm’s financial statements can be
compared with
*The firm’s own past ratios (Trend Analysis)
*Ratios of competitors or industry (Cross – sectional Analysis)
4 Groups of Financial Ratios
1. Liquidity Ratios
2. Profitability Ratios
3. Asset Management Ratios
4. Debt Management Ratios