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BUS 508 Explore Activity Week 5 Discussion How You see It income statement or balance PART 1 OF 2
HOW YOU SEE IT
- Accounting is a system of recording the financial activities of a business to help with reporting and decision-making. To summarize the business’s activities, accountants prepare three financial statements:
- The income statement summarizes the revenue earned from sales and the expenses it took to earn that revenue.
- The balance sheet summarizes the assets owned or controlled by the company, the liabilities (or debt obligations) it still has to pay others, and any left-over equity that belongs to the business’s owners or stockholders.
- The statement of cash flows shows how money enters the company (cash collections) and leaves the company (cash payments).
WAIT, WHAT IS IT CALLED?
Make sure to be careful! These three financial statements are often referred to by other names.
- The income statement is also known as the profit-and-loss statement
- The balance sheet is also known as the statement of financial condition
- The statement of cash flows is also known as the cash flow statement
By the end of this week, you’ll have an understanding of how businesses use accounting to keep track of a business’s finances and how they capture that information in financial statements that give people a snapshot of a business.
Why Is This Important?
The truth is that, without accounting, it would be very difficult to measure success. More importantly, it would be nearly impossible to make important decisions about how to use a business’s resources—or to measure how effectively resources such as cash are being used. Additionally, without accounting, there would be no useful financial information about the business, which would make it difficult for managers, employees, and investors to plan effectively.In short, running a business without a clear way of keeping track of things would be very, very difficult. Accounting takes away the guesswork and provides important data to guide the actions of the business. It goes beyond that, too. Businesses also have to provide information to outside parties—investors, partners, and the government, for example—and that information needs to be easily understandable. If these outside parties, many of whom are essential to businesses’ success, had to learn a whole new system each time they reviewed a business’s finances, they would not be nearly as helpful. Accounting provides a common system, a common language, to overcome these challenges.
What do you know about the financial health of the business you work for? How do you know how well the business is doing? What role—if any—do you play in the accounting process? (Hint: Everyone plays a role!) Can you think of an example where a business got into trouble for bad accounting practices?
How Does This Connect to the other Parts of Business?
As mentioned above, accounting gives us important information about how a business is doing. That information is used to make short-term and long-term decisions for the business. Without a way to compare numbers, business leaders would not know if their new sales team is working out, or if they have money left to spend on advertising, or how much the company is worth.All parts of a business should contribute to the overall success of the business. To measure success, accounting gives us a clear financial picture of the impact of each business unit on the finances of the company as a whole. This lets managers know where to focus, how to allocate resources, and where they should be spending their time.To get our minds thinking a bit more about accounting, let’s move on to this week’s Explore Activity.
Find an income statement or balance sheet for a business. Review the accounting concepts and the income statement or balance sheet to answer the following questions:
1. How is the business performing based upon your review? Is the business growing or declining, why?2. Where is the business focusing the majority of its resources?3. What advice would you offer to the owner or leadership of the business?