Financial Statements and Business Decisions

#accounting

Introduction
Managers are internal decision makers, while stockholders and creditors are external
decision makers.

Business activities include:

Financing activities - borrowing or paying back money to lenders and receiving
additional funds from stockholders or paying them dividends
Investing activities - buying or selling items such as plant and equipment used in
production
Operating activities - day to day processes of raw material purchases, production,
delivery, cash collection and paying suppliers

Managerial/management accounting: developing accounting information for internal

decision making

Financial accounting: accounting for external decision makers (investors, creditors)

The Four Basic Financial Statements

The Balance Sheet
The purpose of the balance sheet is to report the financial position (comprised of the
assets, liabilities and stockholder’s equity) at a particular point in time.

Structure
The heading includes items to identify the statement:
Name of the entity — Le Nature’s Inc.
Title of the statement — Balance Sheet
Specific date of the statement — As of December 31, 2012
Unit of measure — (in millions of USD)

> The organisation for which financial data are to be collected is called an accounting entity,
and must be precisely defined in the statement.
 The basic accounting equation (aka balance sheet equation) is as follows:
ASSETS = LIABILITIES + STOCKHOLDER’S EQUITY

Elements
Assets are the economic resources owned by the entity. Every asset on the balance sheet
is initially measured at the total cost incurred to acquire it. Balance sheets do not usually
show the amounts for which the assets could currently be sold.

Liabilities indicate the amount of financing provided by creditors. They are the company’s
debts/obligations.

> Accounts payable arise from purchase of goods or services from suppliers on credit
without a formal written contract. Notes payable, on the other hand, result from cash
borrowings based on a formal written debt contract with banks.

Stockholder’s Equity indicates the amount of financing provided by owners of the

business, and retained/reinvested earnings.

The Income Statement

The income statement reports the accountant’s primary measure of performance of a
business: revenues minus expenses during the accounting period.

Structure
The heading identifies the name of the entity, the title of the report, the accounting period
and the unit of measure.

Elements
Revenues are earned from the sale of goods or services to customers. They are normally
amounts expected to be received for goods or services that have been delivered to a
customer, whether or not the customer has paid for the goods or services.

Expenses represent the monetary amount of resources the entity used to earn revenues
during the period.