Introduction to Business - Chapter 5: Accounting & Finance Principles PDF

Introduction to Business Chapter (5) Accounting & Finance Principles Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Learning Outcome 6 The learner will: Understand the main accounting concepts and sources of finance for.business Define and explain basic acc...

Introduction to Business Chapter (5) Accounting & Finance Principles Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Learning Outcome 6 The learner will: Understand the main accounting concepts and sources of finance for.business Define and explain basic accounting and 6.1.budgeting concepts Describe and evaluate different sources of 6.2.finance for business Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Definition of Accounting a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements The Nature of accounting The accounting system is a series of steps performed to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an  Different types of Accounting Financial accounting is primarily concerned with the recording & reporting of economic data and activities for a business to external parties. Managerial accounting uses both financial accounting and estimated data to support management in running day-to-day operations and in planning future operations. Accountants and their staff who provide services to the public (i.e. individuals and corporations) on a fee basis are said to be employed in public accounting. E.g. KPMG, 4 Accounting as an Aid to Decision Making ⚫ Fundamental relationships in the decision-making process: Accountant’s Financial Event analysis & Users Statements recording  The accounting equation 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned The rights of the by a business The rights of the owners creditors, which represent debts of the business 6 Why Accounting is important ⚫ Accounting information is useful to anyone who makes decisions that have economic results. ⚫ Managers want to know if a new product will be profitable. ⚫ Owners want to know which employees are productive. ⚫ Investors want to know if a company is a good investment. ⚫ Creditors want to know if they should extend credit, how much to extend, and for how long. ⚫ Government regulators want to know if financial statements adapt to requirements. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  What is Finance ⚫ The function in a business that acquires funds and manage those funds in the business ⚫ Also it’s the study of how people and businesses evaluate investments and raise capital to fund them Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Financial decisions ⚫ Financing decision – where is money going to come from ⚫ Investment decision – how much to invest and in what assets Operations Financial markets Financial s Investment Financing Manager The goal of financial management Maximizing shareholder’s wealth Maximizing stock prices Financing decisions Financing decisions Internal corporate External sources financing of funds Direct financing Indirect financing Retained earnings (financial markets (financial Instruments) Intermediaries) Stocks Loans Debt instruments (bonds, CPs etc.) Four PRINCIPLEs of Finance. Principle 1: Money Has a Time Value ⚫ A dollar received today is more valuable than a dollar received in the future. ⚫ We can invest the dollar received today to earn interest. as a result, in the future, you will have more than one dollar, as you will receive the interest on your investment plus your initial invested dollar. PRINCIPLE 2: There is a Risk-Return.Trade-off ⚫ We only take risk when we expect to be compensated for the extra risk with additional return. ⚫ Higher the risk, higher will be the expected return. PRINCIPLE 3: Cash Flows Are The Source of.Value ⚫ Profit is an accounting concept designed to measure a business’s performance over an interval of time. ⚫ Cash flow is the amount of cash that can actually be taken out of the business over this same interval. Profits versus Cash ⚫ It is possible for a firm to report profits but have no cash. ⚫ For example, if all sales are on credit, the firm may report profits even though no cash is being generated. PRINCIPLE 4: Market Prices Reflect.Information ⚫ Investors respond to new information by buying and selling their investments. ⚫ The speed with which investors act and the way that prices respond to new information determines the efficiency of the market. In efficient markets like United States, this process occurs very quickly.  ?Why Study Finance ⚫ Manage your own funds ⚫ Manage a business’ funds ⚫ Fruitful career opportunities ⚫ Informed policy choices ⚫ Intellectual curiosity