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Our modern economy requires successful business owners to understand the relationship
between economics and accounting and finance. According to Block & Hirt (2005), the
study of economics provides a structure of decision making in the areas of risk analysis,
pricing theory through relationships in supply and demand, comparative return analysis,
and many other more important economic forces. Business owners and financial managers
must understand the institutional structure of the Federal Reserve System, the commercial
banking system and the interrelationships between the various sectors of the economy.
Understanding these various sectors of the economy are part of the key planning strategies
that will improve their day-to-day business decision making. In essence, gross domestic
product, industrial production, disposable income, unemployment, inflation, interest rates,
and taxes are the important variables of our economy which must fit into a business
owners decision model and need to be applied correctly in their strategy planning (Block
& Hirt, 2005, p 5). Business owners face tough and difficult decisions on a daily basis not
only from the external economic factors but also internally, from analyzing the companys
financial statements. These statements are like a road map and a key of success in business
planning and decision making. The three most important financial statements that most
business owners need to start with are: 1) income statements; 2) balance sheets; 3) the
statement of cash flows.
There are two kinds of audiences, internal and external. Internal users that include
company management and board of directors; on the other hand, external users are
shareholders, fund managers and analysts that break down the companys "credit
worthiness", share value, dividends and future earnings. A major device for business
owners is the income statement which measures the profitability of a firm over a period of
tim
