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Overview of Accounting Paper
3/3/08
University of Phoenix
Overview of Accounting Paper
Accounting is sometimes said to be the language of finance because it provides financial
data through income statements, balance sheets, and the statement of cash flows (Block &
Hirt, 2005). The purpose of this paper is to provide basic information on accounting and
finance to the small business owner. By providing the small business owner with the basics
of finance and accounting, enables the company to understand the relationships between
these fields and apply the concepts to their own company. The field of finance is closely
related to economics and accounting, and financial managers need to understand the
relationships between these fields (block & Hirt, 2005). Economics provides a structure for
decision making in such areas as risk analysis, pricing theory through supply and demand
relationships, comparative return analysis, and many other important areas. This paper will
identify the audiences, purposes, and natures of financial statements and managerial
reports and explain the use of financial accounting information in making informed and
ethical business decisions.
Identify the audiences, purposes, and natures of financial statements and managerial
reports.
Financial statements are formal records of a business financial activities. These statements
provide an overview of a business financial condition in both short and long term. The four
types of financial staements are:
1. Balance sheet: is a statement that details the financial position or condition of a
company, reports on a companys assets, liabilities and net equity as of a given point in
time. The income statement and balance sheet used together, will anwer questions like:
How much did the company make or lose, and what is a measure of its worth? (Block&
Hirt 2005)
2. Income statement: is the profit or loss statement, and reports on a companys results of
operations over a period of time. This statement is presented in a stair step fashion so
profits or losses can be deducted after each expense is recorded. The ncome statement and
balance sheet uses the accrual method of accounting. This means revenues and expenses
are only recognized as they occur rather than when the cash exchanges hands.
3. Statement of retainedearnings: explains the changes in a companys retained earnings
over the reporting period.
4. Statement of cash flows: reports on a companys cash flow activities, particularly its
operating, investing and financing activities. "The purpose of this statement is to
emphasize the critical nature of cash flow to the operations of the firm. According to
