Overview of Accounting

It also gives its view of the relevant trends and challenges that the business faces . This allows the audience to see the financial condition of the business from the perspective of management and allows the audience to make informed and ethical decisions . In other words it provides the audiences the background that is required to study and understand the financial statements

Financial accounting information can be used in making informed and ethical business decisions . How ? The income statement shows the earning per share , a calculation that tells you how much you as

a shareholder would receive if the company distributed all its earnings . This allows you to make an invest / non invest decision . Giving more information about the financial health of the company is the cash flow statement . It divides cash flow into flows from operating activities , investing activities and financing activities . This informs not only the investors but also the management , employees , suppliers and customers about the source of cash for the company and allows them to make better decisions The footnotes of the reports give important information that helps make efficient and ethical decisions . The footnotes refer to stock options pension plans , income taxes and important accounting policies and practices . For example , a company may be showing an inflated profit figure because its accounting practices have changed but reading the footnotes helps the audiences make better decisions and ethical decisions with regards to the company . To make ethical and informed decisions it is important to read between the lines of these reports How is this accomplished ? By doing ratio analysis ! Commonly the ratios that are examined are debt-to-equity ratio , inventory turnover ratio operating margin ratio ,

/E ratio and working capital . Consider this well before the Enron scam exploded several investors were able to smell by examining the...