Entrepreneurship: Chapter 8

CHAPTER 8:  ACCOUNTING RECORDS AND FINANCIAL STATEMENTS

Discuss the importance and uses of financial records in a small business

You need financial records so you can make managerial decisions on topics concerning how much money is owed to your business, how much money you owe and how to identify financial problems before they become serious dilemmas. Financial records are also needed to prepare your tax returns and to inform your banker and investors about your business’s financial status. Without accurate financial records, you cannot exercise the kind of clear sighted management control needed to survive in a competitive marketplace.

Itemize the accounting records needed for a small business

The accounting records of your small business need to follow the standards of generally accepted accounting principles (GAAP). From your source documents such as sales slips, purchase invoices, and check stub, you should record all the transactions in journals. Information from your journals should then be posted in (transferred into) a general ledger.  Financial statements like your balance sheet, income statement, and statement of cash flow are produced from the transactions in our general ledger.

Explain the ratios used to analyze financial statements

Ration analysis enales you to compare the financial condition of your business to its performance in previous time periods or to the performance of similarly sized businesses within your industry. Foru important types of financial ratios discussed in this chapter are:-

• liquidity (current and quick, or acid-test, ratios)
• activity (inventory, turnover, average collection period, fixed asset turnover, total asset turnover)
• leverage (debt and times interest earned)
• profitability ratios (net profit margin, return on assets, return on equity)

Illustrate the importance of and procedures for managing cash flow

Cash flow is the different between the amount of cash actually brought into your business and the amount paid out in a given period of time. cash flow represents the lifeblood of your business because if you do not have enough moeny to pay for your operating expenses, your are out of busienss.

•  My View:  When a small business well-funded by investors, it is important to hire a qualify accountant to keep the book clean & up-to-date. Investors rely heavily on the objectivity and integrity of those who prepare financial statements. When that fiduciary bond is broken, and the reliability of financial statements is called into question. In that case, any confidence that may have been invested in the reporting system is destroyed. In the eyes of the investor, it they cannot trust your financial statements, how can they trust you to continue leading the company.