Cornerstones of Financial and Managerial Accounting

Book Preface

What Is Accounting?

Our economy is comprised of many different businesses. Some companies, such as Apple Inc., focus on providing goods, which for Apple take the form of Macintosh computers, iPod portable digital music players, iPhone cellular phones, or downloadable music. Other companies are primarily concerned with providing services. For example, Walt Disney offers a variety of entertainment services from theme parks to motion pictures. While most entities, like Apple and Disney, exist in order to earn a profit, some are organized to achieve some other benefit to society (e.g., school districts exist to meet the educational needs of a community). Regardless of their objective, all entities use accounting to plan future operations, make decisions, and evaluate performance.

Accounting is the process of identifying, measuring, recording, and communicating financial information about a company’s activities so decision makers can make informed decisions. Accounting information is useful because it helps people answer questions and make better decisions.

The demand for accounting information comes from both inside and outside the business. Inside the business, managers use accounting information to help them plan and make decisions about the company. For example, they can use accounting information to predict the consequences of their future actions and to help decide which actions to take. They also use accounting information to control the operations of the company and evaluate the effectiveness of their past decisions. Employees use accounting information to help them judge the future prospects of their company, which should translate into future promotion opportunities. Outside the business, investors use accounting information to evaluate the future prospects of a company and decide where to invest their money. Creditors use accounting information to evaluate whether to loan money to a company. Even governments use accounting information to determine taxes owed by companies, to implement regulatory objectives, and to make policy decisions. This demand for accounting information is summarized by Exhibit 1-1.

Accounting is more than the process of recording information and maintaining accounting records—activities that are frequently called bookkeeping. Accounting is the ‘‘language of business’’. That is, accounting can be viewed as an information system that communicates the economic activities of a company to interested parties. The focus of this book is on providing information that satisfies the needs of external decision-makers (outside demand) and is termed financial accounting. The objectives of financial accounting involve providing decision-makers with information that assists them in assessing the amounts, timing, and uncertainties of a company’s future cash flows. This information is provided through four basic financial statements: the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows.

In this chapter, we will discuss the basic functioning of the accounting system within a business. We will address the following questions:
. What forms do businesses take?
. What are the basic activities in which businesses engage?
. How does the accounting system report these activities?
. How can decision-makers use the information provided by the accounting system?

Regardless of your major or future plans, knowledge of accounting and the ability to use accounting information will be critical to your success in business.