Accounting: formally defined as a system of providing “quantitative information, primarily

financial in nature, about economic entities that is intended to be useful in making economic

decisions”

o An accounting system is used by a business to handle routine bookkeeping tasks and to

structure the information so it can be used to evaluate the performance and status of

the business

o Numbers: accounting is quantitative, this is strength because numbers can be easily

tabulated, but also a weakness because important business events (e.g. a toxic waste

spill and associated lawsuits and countersuits) cannot be easily described by numbers

o A financial dimension: the status and performance of a business is affected by and

reflected in many dimensions (financial, personal relationships, community and

environmental impact, public image); accounting only focuses on finances

o Usefulness: accounting exists only because it is useful

o Future decisions based on past information: although accounting is the structured

reporting of what has already occurred, this past information can only be useful if it

impacts decisions about the future

o Balance sheet

▪ Reports the resources of a company (the assets), the company’s obligations (the

liabilities), and the owners’ equity, which represents how much money has been

invested in the company by its owners

▪ Assets = Liabilities + Equity

o Income statement

▪ Reports the amount of net income earned by a company during a period, with

annual and quarterly income statements being the most common

• Net income is the excess of a company’s revenues over its expenses; if

the expenses are more than the revenues, then the company has

suffered a loss for the period

▪ The income statement representsthe accountant’s best effort at measuring the

economic performance of a company

▪ Revenue – Expenses = Net Income

o Statement of Cash Flows

▪ Reports the amount of cash collected and paid out by a company in the

following three types of activities: Operating, Investing, and Financing

• The most objective of the financial statements because it involves a

minimum of accounting estimates and judgments

• Provide information about the past that will help decision makers;

evaluate the results of past decisions, and project the effect of future

decisions

▪ Report of cash coming in (being earned e.g. revenues, loans, etc.) and cash going

out (being spent, e.g. buying new buildings, paying back loans, etc.)

- External Users of Accounting Information

o Lenders are interested in one thing – being repaid with interest; often ask for