Corporate Finance

Text Questions and Exercises

Chapter One

5. “Why is accounting often referred to as the “language of business”?

Accounting is frequently named the language of business because it offers the methods of documenting and communicating business actions and the results of those activities (Albrecht, Stice, Stice, & Swain, 2007, p. 6). Accounting is a method for arriving at quantifiable info of financial data intended to be used in making economic decisions within a business or company environment. The elements are:

1). Measureable because accounting communicates numbers. This is can be a strength or a weakness. Numbers can be formulated and summarized although other business events such as associated lawsuits cannot be easily defined by a couple of numbers.

2). Financial because the well-being of a business are influenced within multiple dimensions such as financial, community, environmental influence, and corporate social responsibility; accounting centers on the fiduciary aspect.

3). Useful because the exercise of accounting dates back to ancient civilizations of recorded historical times. Accounting procedures used in the United States are designed within a theoretical structure and exists because it is useful as a means to document and predict probability.

4). Decision-making. Data is compiled from previous reports of past business activities, which are useful in predicting future events.

Accounting is the language of business. It affords the wherewithal of documenting and collaborating the achievements and botches of a company. Without it data most vital to financial assessments would be prepared carelessly. Shareholders would not be able to differentiate between a lucrative business and one on the brink of collapse.

7. What are generally accepted accounting principles (GAAP)? Who currently develops and issues GAAP? What is the purpose of GAAP?

According to the Federal Accounting Standard Advisory Board (FASAB):

The term "generally accepted accounting principles" has a specific meaning for accountants and auditors. The AICPA Code of Professional Conduct prohibits members from expressing an opinion or stating affirmatively those financial statements or other financial data present fairly in conformity with generally accepted accounting principles. Generally accepted accounting principles are guidelines for the preparation of financial statements (FASAB, 2011, p. 1).

Each openly traded business must disclose their finance statements yearly. These official documents are used by shareholders and creditors to decide the fiduciary well-being of the business and its appropriateness for extending of financial credit. To accurately to equate and appraise businesses and