Summary Chapter 7 - Business Management 114

Chapter 7- Using Accounting Information
Why is accounting information important?
Bankers, creditors, investors etc. rely on auditor’s opinion.
GAAP – generally accepted accounting principles

Who uses Accounting information?
Managers, employees, lenders and suppliers are the main users of
financial statements.

Managers and employees
 Planning
 Organize
 Lead and motivate
 Control
Lenders and suppliers
 Evaluate credit application
 Evaluate non-payment risk
Stockholders and Potential Investors
 Evaluate financial health of firm
 Evaluate investment risk
Government Agencies
 Confirm tax liabilities
 Confirm payroll reductions
 Approve new issues of stocks and bonds

Types of accounting
o Managerial accounting – provides managers and employees
with information to make decision
o Financial Accounting – generates financial statements and
reports

Accounting equation
Assets = Liabilities + Owners Equity

Using accounting information to evaluate a potential investment
 Use common sense to interpret the numbers
 Financial statements should be audited by an outside source
 Look for use of new strategies to reduce costs
 Determine the firm’s ability to pay its debts and borrow
money in the future
 Look at how the numbers relate to each other
 Understand the financial ratios

Study ratios from slides