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An income statement
The importance of the above two statements
1.General definition of accounting Today, it is impossible to manage a business operation without accurate and timely accounting information. Managers and employees, lenders, suppliers, stockholders, and government agencies all rely on the information contained on two financial statements. These two reports – the balance sheet and the income statement – are summaries of a firm’s activities during a specific time period. They represent the results of perhaps tens of thousands of transactions that have occurred during the accounting period. Accounting is the process of systematically collecting, analyzing, and reporting financial information. The basic product that an accounting firm sells is information needed for the clients. Many people confuse accounting with bookkeeping. Bookkeeping is a necessary part of accounting. Bookkeepers are responsible for recording (or keeping) the financial documents that the accounting system processes. The primary users of accounting information are managers. The firm’s accounting system provides the information dealing with revenues, costs, accounts receivables, amounts borrowed and owed, profits, return on investment, and the like. This information can be compiled for the entire firm; for each product; for each sales territory, store or individual salesperson; for each division or department; and generally in any way that will help those who manage the organization. Accounting information helps managers plan and set goals, organize motivate, and control. Lenders and suppliers need this accounting information to evaluate credit risks. Stockholders and potential investors need the information to evaluate soundness of investments, and government agencies need it to confirm tax liabilities, confirm payroll deductions, and improve new issues of stocks and bonds. The firm’s accounting system must be able to provide all this information, in the required form. 2. The basis for the accounting process The basis for the accounting process is the accounting equation. It shows the relationship among the firm’s assets, liabilities and owner’s equity. Assets are the items of value that a firm owns – cash, inventories, land, equipment, buildings, patents, and the like. Liabilities are the firm’s debts and obligations – what it owes to others. Owner’s equity is the difference between a firm’s assets and its liabilities – what would be left over for the firm’s owners if its assets were used to pay off its liabilities. The relationship among these three terms is the following: Owner’s equity = assets – liabilities (The owner’s equity is equal to the assets minus the liabilities) For a sole proprietorship or partnership, the owner’s equity is shown as the difference between assets and liabilities. In a partnership, each partner’s share of the ownership is reported separately by each owner’s name. For a corporation, the owner’s equity is usually referred to as stockholders’ equity or shareholders’ equity. It is shown as the total value of its stock, plus retained earnings that have accumulated to date. By moving the above three terms algebraically, we obtain the standard form of the accounting equation. Assets = liabilities + owners’ equity (The assets are equal to the liabilities plus the owners’ equity) 3. A balance sheet A balance sheet (or statement of financial position), is a summary of a firm’s assets, liabilities, and owners’ equity accounts at a particular time, showing the various money amounts that enter into the accounting equation. The balance sheet must demonstrate that the accounting equation does indeed balance. That is, it must show that the firm’s assets are equal to its liabilities plus its owners’ equity. The balance sheet is prepared at least once a year. Most firms also have balance sheets prepared semiannually, quarterly, or monthly. 4. An income statement An income statement is a summary of a firm’s revenues and expenses during a specified accounting period. The income statement is sometimes called the statement of income and expenses. It may be prepared monthly, quarterly, semiannually, or annually. An income statement covering the previous year must be included in a corporation’s annual report to its stockholders 5. The importance of the above two statements The information contained in these two financial statements becomes more important when it is compared with corresponding information for previous years, for competitors, and for the industry in which the firm operates. A number of financial ratios can also be computed from this information. These ratios provide a picture of the firm’s profitability, its short-term financial position, its activity in the area of accounts receivables and inventory, and its long-term debt financing. Like the information on the firm’s financial statements, the ratios can and should be compared with those of past accounting periods, those of competitors, and those representing the average of industry as a whole. Answer the questions:
DEFINITION OF MANAGEMENT VOCABULARY
Management is based on scientific theories and today we can say that it is a developing science. But knowledge of theories and principles doesn’t provide practical results. It is necessary to know how to apply this knowledge. Practical application of knowledge in the management area requires certain abilities or skills. Here is an example: Depending on its size, an organization may employ a number of specialized managers who are responsible for particular areas of management. A very large organization may employ many managers, each responsible for activities of one management area. In contrast, the owner of a sole proprietorship may be the only manager in the organization. He or she is responsible for all levels and areas of management. What is important to an organization is not the number of managers it employs but the ability of these managers to achieve the organization’s goals, and this ability requires a great skill. In other words, the management is the process of coordinating the resources of an organization to achieve the primary organizational goals. MAIN RESOURCES Managers are concerned with the following main resources: Material Human Financial Informational Organizational resources resources resources resources goals 1 2 3 4 1. Material resources are physical materials and equipment used by an organization to make a product. For example, cars are made on assembly lines. These assembly lines and the buildings that house them are material resources. 2. The most important resources of any organization are its human resources – people. Some firms believe that their employees are their most important assets. To keep employees content, a variety of incentives are used, including higher-that-average pay, flexible working hours, recreational facilities, lengthy paid vacations, cafeterias offering inexpensive meals, etc. 3. Financial resources are the funds the organization uses to meet its obligations to various creditors. A grocery store obtains money from customers and uses a portion of that money to pay the wholesalers from which it buys food. A large bank borrows and lends money. A college obtains money in the form of tuition, income from its endowments, and federal grants. It uses the money to pay utility bills, insurance premiums, and professors’ salaries. Each of these transactions involves financial resources. 4. Finally, many organizations increasingly find they cannot ignore information. External environment – including economy, consumer markets, technology, politics, and cultural forces – are all changing so rapidly that an organization that does not adapt will probably not survive. And, to adapt to change, the organization must know what is changing and how it is changing. Companies are finding it is increasingly important to gather information about their competitors in today’s business environment. It is important to realize that these are only general categories or resources. Within each category are hundreds or thousands of more specific resources, from which management must choose those that can best accomplish its goals. Managers must coordinate this complex group of specific resources to produce goods and services. Answer the questions.
MANAGEMENT SKILLS VOCABULARY
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