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ACCOUNTING AND FINANCE

A large corporation is a team effort. All the players the shareholders, lenders, directors, management, and employees have a stake in the company`s success and all therefore need to monitor its progress. For this reason the company prepares regular financial accounts and arranges for an independent firm of auditors to certify that these accounts present a ¬true and fair view. ­

Until the mid-nineteenth century most businesses were owner-managed and seldom required outside capital beyond personal loans to the proprietor. When businesses were small and there were few outside stakeholders in the firm, accounting could be less formal. But with the industrial revolution and the creation of large railroad and canal companies, the shareholders and bankers demanded information that would help them gauge a firm`s financial strength. That was when the accounting profession began to come of age. We don`t want to discuss the details of accounting practice. But because we will be referring to financial statements throughout this book, it may be useful to review briefly their main features. In this material we introduce the major financial statements, the balance sheet, the income statement, and the statement of cash flow. We discuss the important differences between income and cash flow and between book values and market values. We also discuss the federal tax system.

After studying this material you should be able to

_ Interpret the information contained in the balance sheet, income statement, and statement of cash flows.

_ Distinguish between market and book value.

_ Explain why income differs from cash flow.

_ Understand the essential features of the taxation of corporate and personal income.