Overview of Accounting

Running head: Overview of Accounting

Overview of Accounting

Kristie Richards

MBA 503

University of Phoenix

September 10, 2007

Overview of Accounting

In the following informational presentation I will be explaining the differences of financial reports. I will also explain how ethical business decision making is used in financial reporting.

Financial Statements

Accountants, shareholders, stock brokers, financial managers, and CEO’s, to name a few use several financial statements to relate to how well a company is doing financially. I will share with you the most used reports and explain the purpose for each report and how it can relate to your position in the company. First is the income statement. The income statement is a major device for measuring the profitability of a company over a period. The income statement covers a defined period of time, whether it is one month, three months or a year. It is easy to read the profit or loss after the expense items are deducted. In order for managers to view gross profit you will have sales minus goods sold. With knowing gross profit you can determine the profit from operations by subtracting selling and administrative expense and depreciation from gross profit to obtain operating profit. Operating profit can measure how efficient management is generating revenue and controlling expenses. Second is the balance sheet. The balance sheet indicates what the company owns and how assets are financed in the form of liabilities or ownership interest. The balance sheet is a snapshot at that point in time of the company. It does not represent the transaction for a specific month but it shows all of the transactions that have affected the company since the beginning. Using the balance sheet with the income statement financial managers can answer how much revenue the company made or lost and how much the company is worth. Third is the statement of cash flow. The purpose of this report is to emphasize the nature of the cash flow to the operations of the company. According to accountants, cash flow represents cash or cash equivalent items that can be converted into cash within 90 days. For example, money market funds or additional investments.

To summarize the above the financial manager must be familiar with the accounting reports to administer the finances of the company. The income statement provides a measure of the company’s profitability over a specific period of time. The balance sheet is a snapshot of the financial position of the company at a point in time with the stockholders’ equity representing ownership interest. The statement of cash flow presented to stockholders and security analysts emphasizes the importance of cash flow to the operations of the company. This statement can help the company assess the ability to pay cash dividends, invest in new equipment ect.

Ethical Business Decision

In this section I am going to explain the use of accounting and financial information to make informed and ethical business decisions. Maximizing shareholder wealth is also a social concern for a company. By having policies that maximize values in the market, the company can gain capital, provide employment and other benefits for the community. Unethical and illegal financial practices on Wall Street by corporate financial managers have made news headlines frequently. Insider trading has been one of the most widely publicized issues in recent years. Insider trading occurs when someone has information that is not available to the public and then uses this information to profit from trading a companies publicly traded securities. This practice is illegal and protected by the Securities and Exchange Commission (SEC). The insider can be anyone from a manager, corporate lawyer, or printer of the financial statements. Anyone who has knowledge before public announcement of the information can benefit from the news. Everyone can remember Martha Stewart, American Icon, and her former broker. On June 5, 2003 Martha Stewart and her former broker were indicted by federal