Chapter 1 The Role of Accounting in Business 27SUMMARY OF LEARNING GOALS
11 Additional financial statement analyses will be discussed and illustrated throughout the remainder of this
text.Describe the types and forms of businesses, how
businesses make money, and business stakeholders.
The three types of businesses operated for profit include
manufacturing, merchandising, and service businesses. Such
businesses may be organized as proprietorships, partnerships,
corporations, and limited liability companies. A business may
make money (profits) by gaining an advantage over its com-
petitors using a low-cost or a premium-price emphasis. Under
alow-cost emphasis, a business designs and produces products
or services at a lower cost than its competitors. Under a
premium-price emphasis, a business tries to design products or
services that possess unique attributes or characteristics for
which customers are willing to pay more. A business’s eco-
nomic performance is of interest to its stakeholders. Business
stakeholders include four categories: capital market stakehold-
ers, product or service market stakeholders, government
stakeholders, and internal stakeholders.
Describe the three business activities of financing,
investing, and operating.All businesses engage in
financing, investing, and operating activities. Financing
activities involve obtaining funds to begin and operate a
business. Investing activities involve obtaining the necessary
resources to start and operate the business. Operating activi-
ties involve using the business’s resources according to its
business emphasis.
Define accounting and describe its role in business.
Accounting is an information system that provides re-ports to stakeholders about the economic activities and con-
dition of a business. Accounting is the “language of business.”Describe and illustrate the basic financial statements
and how they interrelate.The principal financial
statements of a corporation are the income statement, the
retained earnings statement, the balance sheet, and the state-
ment of cash flows. The income statement reports a period’s
net income or net loss, which also appears on the retained
earnings statement. The ending retained earnings reported
on the retained earnings statement is also reported on the
balance sheet. The ending cash balance is reported on the
balance sheet and the statement of cash flows.Describe eight accounting concepts underlying finan-
cial reporting.The eight accounting concepts discussed
in this chapter include the business entity, cost, going con-
cern, matching, objectivity, unit of measure, adequate disclo-
sure, and accounting period concepts.Describe and illustrate how horizontal analysis can
be used to analyze and evaluate a company’s perfor-
mance.One method of analyzing financial performance is to
compute percentage increases and decreases in related items
in comparative financial statements. This type of analysis,
called horizontal analysis, compares each item on the most
recent financial statement with the related item on one or
more earlier statements.1
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3
4
5
6
GLOSSARY
Account payableThe liability created when a business bor-
rows from a vendor or supplier.
AccountingAn information system that provides reports to
stakeholders about the economic activities and condition of a
business.
Accounting equationAssetsLiabilitiesStockholders’
Equity.
Accounting period conceptA concept of accounting in
which accounting data are recorded and summarized in a
periodic process.Accounts receivableRights to payments from customers.Adequate disclosure conceptA concept of accounting
that requires that the financial statements include all relevant
data a reader needs to understand the financial condition and
performance of a business.AssetsThe resources owned by a business.additional analyses as well as comparisons with the operating results of competitors
should be performed, as discussed at the end of Chapter 14.^11