Accounting

Introduction

This paper was devised to give small business owners an insight to the financial statement and managerial reports that are essential for business. The financial statement consists of an income statement, balance sheet and statement of cash flow. This paper will provided an explanation of proper financial accounting and ethical business decisions making techniques.

Audiences, Purposes and Nature of Financial Statement

Business owners, CEO’s and managers are among those who are the important decision makers of their companies. To make these important decisions many pieces of information are needed. The financial operation of any business is one of the most important aspects of business management. Some of the most important tools available to managers today are financial statements and managerial reports. The business managers basic knowledge and understanding of these reports are essential in the decision making process. Three types of financial statements that are relative to business, the income statement, balance sheet and statement of cash flow. These three statements provide key information on the overall health of a business. The first type of financial statement is the income statement, is the major device for measuring the profitability of a firm over a period of time. (Block-Hirt, p. 25). They are in a stair-step or progression form from top to bottom, with sales at the top and subtract the cost of goods to determine the gross profits. Next subtract the selling and administrative expenses to determine the profits or losses of the business. Then other administrative expenses are subtracted to determine what the company has earned. The second type of financial statement is the balance sheet, indicates what the firm owns and how these assets are financed in the form of liabilities or ownership interest (Block-Hirt, p. 28). This sheet contains the following business information; current assets, marketable securities, accounts receivable, inventory, prepaid expenses, investments as well as plant and equipment. Liabilities represent financial obligations of the firm and move from current liabilities (due within one year) to longer-term obligations, such as bonds. (Block- Hirt, p. 28) Stockholder’s equity represents the total contributions and ownership interest of preferred and common stockholders. (Block-Hirt, p. 30)

The last type of financial statement is the statement of cash flow. The purpose of the statement of cash flow is to emphasize the critical nature of cash flow to the operations of the firm. (Block-Hirt, p. 31). This refers to cash or cash equivalent items that can be converted within 90 days to cash. Three sections of the cash flow statement operations, financing, and investing. The first two sections show the two ways the company can get cash. Operations means "making" money by selling goods and services; financing means "raising" money by issuing stocks and bonds. The third section shows how the company is spending cash, investing in its future growth. (Money Chimp, 1997-2008) Managerial reports such as trend analysis are useful when making decision as to which direction a company is going to take. This report can also illustrate the company performance in the industry. Another useful tool is ratio analysis for managers. Ratios are good for measuring a company’s ability to earn a profit on sales, pay off short term debts and give a general picture of how a company is doing.