{"id":58,"date":"2026-02-05T19:04:38","date_gmt":"2026-02-05T19:04:38","guid":{"rendered":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/?post_type=chapter&#038;p=58"},"modified":"2026-08-17T20:07:46","modified_gmt":"2026-08-17T20:07:46","slug":"ch-8-accounting","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/chapter\/ch-8-accounting\/","title":{"rendered":"CH 8 &#8211; Accounting"},"content":{"raw":"<div style=\"font-weight: 400\">\r\n\r\nImagine you\u2019re invited to play the most high-stakes poker game in the world. The buy-in is your entire life savings. You sit down, and you realize... you don't know the rules. Everyone else is speaking a language you don't understand, and they are taking your money while you smile and nod.\r\n\r\n<img src=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/02\/acct1.jpg\" alt=\"\" width=\"663\" height=\"379\" class=\"alignright wp-image-102 size-full\" style=\"font-size: 18.6667px\" \/>\r\n\r\n<\/div>\r\n<div style=\"font-weight: 400\">\r\n\r\nIn the world of business, that language is\u00a0<strong>Accounting<\/strong>. If you don't know it, you aren't a player, you\u2019re just a spectator watching someone else spend\u00a0your money. Even if you want to be a YouTuber, a doctor, or a high-end designer, if you can't read a profit and loss statement, you're just an employee for someone who can.\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\nAccounting aims to provide users with relevant and timely information to help them make good economic decisions.\r\n\r\nThe Warren Buffett quote. \u201c<em>Accounting is the language of business<\/em>,\u201d emphasizes that you can't play the game if you don't know how to read the scoreboard. It positions accounting as a vital skill rather than a chore. Essentially, it\u2019s like keeping a detailed record of all the money that comes in and goes out, which helps make better financial decisions.\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h1 style=\"text-align: center\">CHAPTER OUTLINE<\/h1>\r\n<p style=\"text-align: center\">8.1: Who does it?<\/p>\r\n<p style=\"text-align: center\">8.2: Branches of Accounting<\/p>\r\n<p style=\"text-align: center\">8.3: Ethics in Accounting<\/p>\r\n<p style=\"text-align: center\">8.4: Accounting Terms<\/p>\r\n<p style=\"text-align: center\">Do you want to make this a career?<\/p>\r\n<p style=\"text-align: center\">Don\u2019t want to make this a career?<\/p>\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n<hr \/>\r\n\r\n&nbsp;\r\n\r\n<header>\r\n<h1 class=\"entry-title\">8.1 Who does it?<\/h1>\r\n<\/header><img src=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct2.jpg\" alt=\"\" width=\"624\" height=\"351\" class=\"aligncenter wp-image-115 size-full\" \/>\r\n\r\n<strong>Public accountants<\/strong><span>\u00a0<\/span>prepare tax reports, perform external audits, and give advice to companies.\r\n\r\n<strong>Management accountants<\/strong><span>\u00a0<\/span>assist managers and analyze and prepare reports and financial statements.\r\n\r\n<strong>Government accountants<\/strong><span>\u00a0<\/span>perform different accounting functions for local, state, or federal government agencies.\r\n\r\nAccountants need expertise in complex subjects. That is why many of them take certified courses. Certified public accountants (CPAs) are certified to audit the accounting records of public and private organizations and to attest to compliance with generally accepted accounting rules. The offices of CPAs may provide one or more of the following accounting services:\r\n<ul>\r\n \t<li>Auditing financial statements<\/li>\r\n \t<li>Designing accounting systems<\/li>\r\n \t<li>Preparing financial statements<\/li>\r\n \t<li>Developing budgets<\/li>\r\n \t<li>Providing advice on matters related to accounting<\/li>\r\n<\/ul>\r\n<div>\r\n\r\nThese establishments may also provide related services, such as bookkeeping, tax return preparation, and payroll processing.\r\n\r\n<hr \/>\r\n\r\n<\/div>\r\n<header>\r\n<h1 class=\"entry-title\">8.2 Branches of Accounting<\/h1>\r\n<\/header><strong>Financial Accounting<\/strong><span>\u00a0<\/span>involves preparing financial statements that help stakeholders understand their firm\u2019s performance through the years and compare the firm\u2019s performance with that of its competitors. Stakeholders need this information to analyze the financial condition of the firm. Investors compare a company\u2019s financial results to other firms in the same industry.\u00a0 The major output of financial accounting (balance sheets, income statements, cash flows) provides fundamental information about a company\u2019s past and future financial performance.\r\n\r\n<strong>Managerial Accounting<\/strong><span>\u00a0<\/span>provides reports and analysis to managers to help them make informed business decisions. A firm\u2019s performance depends on the accuracy and reliability of this information.\r\n<div class=\"textbox textbox--examples\"><header class=\"textbox__header\">\r\n<h3>Think of it this way: A company has two different audiences that need financial information: people inside the company and people outside it. Each audience gets a different type of accounting.<\/h3>\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n<div>\r\n\r\n<strong>Financial Accounting<\/strong><span>\u00a0<\/span>= Reporting to Outsiders\r\n\r\nThis is the \u201cofficial\u201d scoreboard. It\u2019s designed for investors, banks, the IRS, and regulators \u2013 people outside the company who want to know: \u201cIs this company healthy? Should I invest or lend money?\u201d\r\n\r\nIt follows strict rules (called GAAP) so everyone can compare companies apples-to-apples. Think annual reports, balance sheets, income statements. It looks backward, summarizing what has already happened.\r\n\r\n&nbsp;\r\n\r\n<strong>Managerial Accounting<\/strong><span>\u00a0<\/span>= Reporting to Insiders\r\n\r\nThis is the internal dashboard. It\u2019s designed for managers and executives who need to make decisions: \u201cShould we launch this product? Where are we losing money? How do we cut costs?\u201d\r\n\r\nNo strict rules here \u2013 companies report whatever is useful to them. It looks both backward (what happened) and forward (budgets, forecasts, projections).\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n\r\nWhile a regular accountant looks at your finances to make sure the math adds up and your taxes are paid, a forensic accountant looks at the numbers to find out if someone is lying, stealing, or hiding something.<span>\u00a0<\/span><strong>Forensic Accounting<\/strong><span>\u00a0is a specialized field of accounting that involves investigating financial records to detect fraud, inefficiencies, and government waste. It combines accounting, auditing, and investigative skills to analyze financial data and uncover misconduct. Forensic accountants work in law enforcement, government agencies, corporations, and firms to protect financial integrity.<\/span>\r\n<div>\r\n<h2 data-path-to-node=\"13\"><\/h2>\r\n<h2 data-path-to-node=\"13\"><span><strong>Key Skills Needed<\/strong><\/span><\/h2>\r\n<p data-path-to-node=\"14\">To do this job, you need a specific \u201ctoolbox\u201d:<\/p>\r\n\r\n<ol start=\"1\" data-path-to-node=\"15\">\r\n \t<li>\r\n<p data-path-to-node=\"15,0,0\">Skepticism: They don\u2019t take any document at face value.<\/p>\r\n<\/li>\r\n \t<li>\r\n<p data-path-to-node=\"15,1,0\">Attention to Detail: They find the one-cent discrepancy that leads to a million-dollar theft. They need to be able to verify numbers.<\/p>\r\n<\/li>\r\n \t<li>\r\n<p data-path-to-node=\"15,2,0\">Data Analysis: They use software to scan thousands of transactions in seconds to find patterns.<\/p>\r\n<\/li>\r\n<\/ol>\r\n<\/div>\r\n<img src=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct3.png\" alt=\"A few notable examples of Government Waste Scandals where forensic accounting played a key role in exposing financial misconduct\" width=\"624\" height=\"352\" class=\"alignnone wp-image-114 size-full\" \/>\r\n\r\n<em>These cases show how forensic accounting plays a vital role in ensuring accountability and preventing misuse of taxpayer money.<\/em>\r\n\r\n<hr \/>\r\n\r\n&nbsp;\r\n\r\n<header>\r\n<h1 class=\"entry-title\">8.3: <strong style=\"font-size: 1.3rem\">Ethics in Accounting<\/strong><\/h1>\r\n<\/header>Real-world companies have collapsed because of \u201ccreative\u201d math. Whether it\u2019s hiding massive debt or faking profits, these scandals prove that accounting isn\u2019t just about numbers\u2014it\u2019s about trust. Because of past disasters, the profession now has a zero-tolerance policy for unethical behavior.\r\n<h2><strong>Who Makes the Rules?<\/strong><\/h2>\r\nThink of these organizations as the \u201creferees\u201d of the financial world:\r\n<ul>\r\n \t<li><strong><span>The SEC<\/span><\/strong><span>\u00a0<\/span>(Securities and Exchange Commission): The government agency with the ultimate legal power.<\/li>\r\n \t<li><strong><span>The FASB<\/span><\/strong><span>\u00a0<\/span>(Financial Accounting Standards Board): The private group the SEC trusts to write the actual rulebook.<\/li>\r\n \t<li><strong><span>GAAP<\/span><\/strong><span>\u00a0<\/span>(Generally Accepted Accounting Principles): The \u201cground rules\u201d themselves.<\/li>\r\n<\/ul>\r\nThe Goal of GAAP: To ensure financial statements are clear, honest, and consistent so that everyone, from investors to employees, can trust the data.\r\n\r\n&nbsp;\r\n<h2><strong>The \u201cBig Four\u201d Requirements<\/strong><\/h2>\r\nTo follow GAAP, every financial statement must be:\r\n<ul>\r\n \t<li>Understandable: It actually helps people see if the company is healthy.<\/li>\r\n \t<li>Reliable: Based on objective, verifiable facts (not \u201cgut feelings\u201d)<\/li>\r\n \t<li>Consistent: Uses the same math methods year after year.<\/li>\r\n \t<li>Comparable: Formatted so you can easily compare a company\u2019s performance over time.<\/li>\r\n<\/ul>\r\n&nbsp;\r\n\r\n<img src=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct4.png\" alt=\"Accounting Joke\" width=\"624\" height=\"341\" class=\"aligncenter wp-image-113 size-full\" \/>\r\n\r\n&nbsp;\r\n<div class=\"textbox textbox--examples\"><header class=\"textbox__header\">\r\n<h2><strong>The Most Famous Accounting Disaster: Enron<\/strong><\/h2>\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nIf you\u2019ve never heard of Enron, it\u2019s worth a quick look.<span>\u00a0<\/span><a href=\"https:\/\/youtu.be\/jrEf8uabe7E?si=w7eRWdd2tluPS5Wf\">Watch it explained in one minute.<\/a>\r\n\r\nIn short: Enron hid massive debts and faked profits, fooling investors for years. But here\u2019s the kicker \u2014 their accounting firm, Arthur Andersen, actually knew. Instead of blowing the whistle, they helped cover it up, even shredding documents.\u00a0 Arthur Andersen had been in business for 90 years, survived the Great Depression, and employed 85,000 people worldwide. One series of unethical decisions ended all of it.\r\n\r\nThe lesson? Ethical failures don\u2019t only destroy the people who commit fraud. They take down everyone around them too.\r\n\r\n<\/div>\r\n<\/div>\r\n<h3><strong>It Can Happen at Any Scale: The Fall of Sam<\/strong><\/h3>\r\nYou don\u2019t need to be at a Fortune 500 company for ethics to matter. Consider Sam.\r\n\r\nSam landed his first accounting internship at a small, cool sneaker company; free shoes, espresso bar, and skateboarding sponsorships. He was thrilled.\r\n\r\nOne Friday, he was reconciling petty cash and found it was off by exactly $5. He checked everything twice but couldn\u2019t track it down. His stressed supervisor shrugged:<span>\u00a0<\/span><em>\u201cJust adjust it. It\u2019s only five bucks.\u201d<\/em>\r\n\r\nSam felt uneasy, but he didn\u2019t want to be the intern who made a big deal over nothing. So, he made the adjustment and moved on.\r\n\r\nA month later, an internal audit revealed thousands of dollars missing from the same fund. Someone had been skimming small amounts over time, and the fake \u201cadjustments\u201d had been covering the trail. The audit led straight back to Sam\u2019s report.\r\n\r\nSam hadn\u2019t stolen anything. But his signature was on the falsified record, and that was enough. His internship was terminated, and the incident followed him through college.\r\n\r\nSam later said the hardest part wasn\u2019t losing the internship; it was realizing that ethical mistakes don\u2019t always come from greed. Sometimes, they come from going along with something that \u201cseems small.\u201d\r\n<div class=\"textbox textbox--key-takeaways\"><header class=\"textbox__header\">\r\n<h6 class=\"textbox__title\">Key Takeaway<\/h6>\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nIn accounting, every dollar counts \u2026. and so does every decision. Ethics isn\u2019t just about avoiding fraud. It\u2019s about having the courage to speak up even when the problem seems minor, especially when someone in authority tells you not to worry about it.\r\n\r\n<\/div>\r\n<\/div>\r\n<span class=\"pullquote-left\">Red flags don\u2019t come with warning labels. That\u2019s why your judgment matters from day one.<\/span>\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n<em>*Click here to learn about some current accounting scandals:<\/em>\r\n\r\n<a href=\"https:\/\/www.youtube.com\/shorts\/ysTOv4Csr_Y\">First Brands Group<\/a>\r\n\r\n&nbsp;\r\n\r\n<a href=\"https:\/\/www.youtube.com\/shorts\/CZANI4TsQ7Q\">Three of the worst accounting scandals in history\u00a0<\/a>\r\n\r\n<hr \/>\r\n\r\n&nbsp;\r\n\r\n<header>\r\n<h1 class=\"entry-title\">8.4 Accounting Terms<\/h1>\r\n<\/header>\r\n<div class=\"textbox\">\r\n<h2>Cost<\/h2>\r\n<em>What you give up to get something<\/em>\r\n\r\nThis is broader than just money. When you spend $10 on a pizza, the cost is $10. But if you use your Saturday afternoon to bake one yourself, the cost includes your time too (even if you paid nothing.)\r\n\r\nThe \u201ccost\u201d of anything is everything you sacrifice to get it.\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2>Out-of-Pocket Cost<\/h2>\r\n<em>Money actually leaving your wallet<\/em>\r\n\r\nThis is the straightforward one. You pay cash (or resources) and it\u2019s gone.\r\n\r\nExample: You open a coffee shop and pay $2,000\/month in rent, $500 for supplies, and $1,200 in employee wages. All of these are out-of-pocket costs; real dollars flowing out.\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2>Implicit Cost<\/h2>\r\n<em>What you gave up that doesn\u2019t show up on a receipt<\/em>\r\n\r\nIt\u2019s the opportunity cost of using your own resources instead of the next best alternative.\r\n\r\nExample: You quit your $60,000\/year job to run your own bakery. The bakery earns $50,000 profit. Looks good on paper, but you implicitly lost $60,000 in salary you could have earned. That forgone salary is an implicit cost. Your bakery is actually costing you money when you factor it in.\r\n\r\nAnother example: You use a building you own for your business instead of renting it out for $1,500\/month. That $1,500 you\u2019re not collecting is an implicit cost.\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2>Fixed Costs<\/h2>\r\n<em>Costs that don\u2019t change no matter how much you produce<\/em>\r\n\r\nThese are the bills you pay whether you\u2019re slammed with orders or sitting idle.\r\n\r\nExample: Your bakery pays $3,000\/month in rent. It doesn\u2019t matter if you bake 10 cakes or 1,000 cakes that month, rent is still $3,000. Same goes for insurance, equipment loans, or a salaried manager\u2019s pay.\r\n\r\nThe \u201crelevant range\u201d part just means this holds true within normal operating levels. If you somehow needed to rent a second building, your fixed costs would jump.\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2>Variable Costs<\/h2>\r\n<em>Costs that rise and fall with how much you produce<\/em>\r\n\r\nThe more you make, the more these cost. The less you make, the less they cost.\r\n\r\nExample: Every cake at your bakery requires flour, eggs, and butter. If you bake 100 cakes, you buy 100 cakes worth of ingredients. If you bake 500 cakes, you buy 5x the ingredients. Labor for hourly workers works the same way: more production means more hours, means more wages.\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2><strong>Direct Costs<\/strong><\/h2>\r\n<em>Costs you can point straight at a specific product<\/em>\r\n\r\nThese are easy to trace. You look at a sneaker and say \u201cyep, that cost came from making<span>\u00a0<\/span><em>this<\/em><span>\u00a0<\/span>shoe specifically.\u201d\r\n\r\nExamples:\r\n<ul>\r\n \t<li>The leather used to make the shoe \u2192 direct cost<\/li>\r\n \t<li>The rubber sole attached to that shoe \u2192 direct cost<\/li>\r\n \t<li>The worker hours spent stitching<span>\u00a0<\/span><em>that specific<\/em><span>\u00a0<\/span>shoe \u2192 direct cost<\/li>\r\n<\/ul>\r\nIf the cost disappears when you stop making that product, it\u2019s almost certainly a direct cost.\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2><strong>Indirect Costs<\/strong><\/h2>\r\n<em>Costs that keep the whole operation running, but can\u2019t be pinned to one product<\/em>\r\n\r\nThese are trickier. They\u2019re real costs, but they benefit<span>\u00a0<\/span><em>everything<\/em><span>\u00a0<\/span>you make, not just one specific product.\r\n\r\nExamples:\r\n<ul>\r\n \t<li>The factory\u2019s electricity bill \u2192 powers the whole building, not just one sneaker<\/li>\r\n \t<li>The factory manager\u2019s salary \u2192 oversees all products<\/li>\r\n \t<li>Rent on the building \u2192 shelters every product you make<\/li>\r\n \t<li>Cleaning supplies \u2192 used everywhere<\/li>\r\n<\/ul>\r\nYou can\u2019t look at a sneaker and say \u201cthis shoe used exactly $4.17 of electricity.\u201d So indirect costs have to be<span>\u00a0<\/span><em>estimated and spread across<\/em><span>\u00a0<\/span>all your products, which is where things get complicated.\r\n\r\n<\/div>\r\n<div class=\"textbox textbox--examples\"><header class=\"textbox__header\">\r\n<h3 class=\"textbox__title\"><strong>The Problem Indirect Costs Create<\/strong><\/h3>\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nThe old simple approach was to just take all indirect costs and spread them evenly across everything you make. For example: \u201cWe spent $100,000 on overhead this year and made 10,000 sneakers, so we\u2019ll assign $10 of overhead to each shoe.\u201d\r\n\r\nBut what if some sneakers are simple and some are incredibly complex, requiring way more machine time, inspections, and special handling? Spreading costs evenly would make the simple shoe look more expensive than it is, and the complex shoe look<span>\u00a0<\/span><em>cheaper<\/em><span>\u00a0<\/span>than it is. That leads to bad pricing decisions.\r\n\r\nThat\u2019s the problem Activity-Based Costing solves.\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2><strong>Activity-Based Costing (ABC)<\/strong><\/h2>\r\n<em>Assign costs based on what actually drives them<\/em>\r\n\r\nThe idea is simple: costs are caused by activities. Instead of spreading indirect costs evenly, you figure out<span>\u00a0<\/span><em>which activities consume resources<\/em>, and then assign costs based on how much of those activities each product actually uses.\r\n\r\nThe process in plain English:\r\n<ol>\r\n \t<li>Identify the activities that cause costs (things like machine setup, quality inspections, shipping, customer service calls, etc.)<\/li>\r\n \t<li>Assign costs to each activity; figure out what each activity actually costs the business<\/li>\r\n \t<li>Figure out what drives each activity (called a<span>\u00a0<\/span><em>cost driver<\/em>)\u00a0 \u2013 for example, machine setups are driven by the<span>\u00a0<\/span><em>number of setups<\/em>, inspections are driven by<span>\u00a0<\/span><em>number of inspections<\/em>, etc.<\/li>\r\n \t<li>Assign costs to products based on how much of each activity<span>\u00a0<\/span><em>that product<\/em><span>\u00a0<\/span>actually uses<\/li>\r\n<\/ol>\r\nThe Big Takeaway\r\n\r\nThink of it like splitting a dinner bill. The old way is everyone pays equally. ABC is everyone pays for<span>\u00a0<\/span><em>what they actually ordered.<\/em><span>\u00a0<\/span>It\u2019s fairer, and it leads to smarter business decisions around pricing, which products to push, and where you\u2019re actually making (or losing) money.\r\n\r\n<\/div>\r\n<div class=\"textbox textbox--examples\"><header class=\"textbox__header\">\r\n<h3 class=\"textbox__title\">The McDonald\u2019s Example<\/h3>\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nMcDonald\u2019s is actually a perfect real-world case of exactly this problem.\r\n\r\n<strong>The Setup<\/strong>\r\n\r\nFor decades, McDonald\u2019s tried to compete with places like Subway and Chipotle by adding healthier, more complex items to their menu (salads, wraps, customizable burgers, fruit parfaits, artisan sandwiches.) On paper, these items had decent profit margins. Looked good in the basic accounting reports.\r\n\r\n<strong>But here\u2019s what the simple cost reporting was hiding:<\/strong>\r\n\r\nEvery time a customer ordered a custom salad or a build-your-own burger, it required:\r\n<ul>\r\n \t<li>More ingredients to stock and manage<\/li>\r\n \t<li>Longer preparation time<\/li>\r\n \t<li>More staff training<\/li>\r\n \t<li>More kitchen equipment<\/li>\r\n \t<li>Slower drive-through lines (which hurt<span>\u00a0<\/span><em>every<\/em><span>\u00a0<\/span>customer, not just that one)<\/li>\r\n<\/ul>\r\nThat last point is huge. A slower drive-through doesn\u2019t just affect the salad, it affects every single burger, fry, and Happy Meal behind it.\r\n\r\n<strong>What ABC Would Have Revealed<\/strong>\r\n\r\nIf McDonald\u2019s had fully traced the<span>\u00a0<\/span><em>activities<\/em><span>\u00a0<\/span>those complex menu items were driving (extra prep time, inventory complexity, slower service speed, staff confusion) the true cost of that salad would have looked a lot less attractive.\r\n\r\nThe simple items like fries, Big Macs, and sodas were carrying indirect costs from the complex items without anyone fully realizing it.\r\n\r\n<strong>What Actually Happened<\/strong>\r\n\r\nMcDonald\u2019s eventually slashed their menu significantly. They called it a focus on \u201csimplicity and speed.\u201d Franchisee profits went up, drive-through times got faster, and customer satisfaction improved.\r\n\r\nThey were essentially doing what ABC teaches: realizing that complex products consume far more resources than they appear to on a basic report, and that sometimes your \u201cprofitable\u201d product is secretly cannibalizing your whole operation.\r\n\r\n<strong>The one-line lesson<\/strong>\r\n\r\nMcDonald\u2019s thought the salad was making them money. The salad was actually slowing down the thing that<span>\u00a0<\/span><em>really<\/em><span>\u00a0<\/span>made them money: fast, simple, high-volume burgers and fries.\r\n\r\nThat\u2019s the power of understanding where costs actually come from.\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2>Financial Statements<\/h2>\r\nFinancial accountants prepare three basic financial statements to show the condition and performance of the business \u2013 the balance sheet, income statement, and statement of cash flows.\u00a0 Provide external stakeholders with a view of an organization\u2019s financial condition.<span>\u00a0<\/span><em>Large corporations that publicly trade their stocks must publish an annual report with all three of these statements.<\/em>\r\n\r\n<a href=\"https:\/\/www.youtube.com\/shorts\/tIzBVa8zqto\">Financial Statements Explained Simply<\/a>\r\n\r\n<\/div>\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2>The Balance Sheet<\/h2>\r\nA financial statement that reports the financial position of a firm by identifying and reporting the value of the firm\u2019s assets, liabilities, and owners\u2019 equity is the<span>\u00a0<\/span><strong>balance sheet<\/strong>. A balance sheet is basically a financial snapshot of a business at one specific moment in time. It answers one question:\r\n\r\n\u201cWhat does this business own, what does it owe, and what\u2019s left over?\u201d\r\n\r\nThey categorize assets (resources owned by the firm) into<span>\u00a0<\/span><em>current assets<\/em><span>\u00a0<\/span>(property, plant, and equipment) and<span>\u00a0<\/span><em>intangible assets<\/em><span>\u00a0<\/span>(brand, identity, intellectual property).\r\n\r\nAccording to the accounting equation, the value of a firm\u2019s assets must equal the sum of the amount of financing provided by owners and financing provided by creditors. In plain English: Everything you own (total assets) = Everything you owe (total liabilities) + What\u2019s actually yours (owner\u2019s equity)\r\n\r\n<span>The Three Parts<\/span>\r\n\r\nAssets \u2014 everything the business has (cash, equipment, inventory, buildings)\r\n\r\nLiabilities \u2014 everything the business owes (loans, accounts payable, accrued expenses)\r\n\r\nOwner\u2019s Equity \u2014 the owner\u2019s investment in the business\r\n\r\n<\/div>\r\n&nbsp;\r\n<h3>Example: Sam\u2019s Sneaker Shop<\/h3>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>ASSETS<\/strong><\/td>\r\n<td><\/td>\r\n<td><strong>LIABILITIES<\/strong><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash<\/td>\r\n<td>$5,000<\/td>\r\n<td>Bank Loan<\/td>\r\n<td>$8,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Inventory (shoes)<\/td>\r\n<td>$10,000<\/td>\r\n<td>Accounts Payable<\/td>\r\n<td>$2,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Store Equipment<\/td>\r\n<td>$5,000<\/td>\r\n<td><strong>Total Liabilities<\/strong><\/td>\r\n<td><strong>$10,000<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Total Assets<\/strong><\/td>\r\n<td><strong>$20,000<\/strong><\/td>\r\n<td><strong>Owner\u2019s Equity<\/strong><\/td>\r\n<td><strong>$10,000<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNotice that $20,000 = $10,000 + $10,000. The two sides always balance out, which is exactly why it\u2019s called a<span>\u00a0<\/span><em>balance<\/em><span>\u00a0<\/span>sheet.\r\n\r\nThink of it like this: if Sam\u2019s Sneaker Shop closed today, sold everything it owns ($20,000), and paid off all its debts ($10,000), Sam would walk away with $10,000. That\u2019s his equity.\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2>The Income Statement<\/h2>\r\nThe financial statement that reports revenues, expenses, and net income resulting from a firm\u2019s operations over an accounting period is the<span>\u00a0<\/span><strong>income statement<\/strong>. Where a balance sheet is a snapshot, an income statement is more like a highlight reel \u2014 it covers a period of time (a month, quarter, or year) and answers one question:\r\n\r\n\u201cDid this business actually make money?\u201d\r\n\r\nIt\u2019s built on one simple equation:\r\n\r\nRevenue \u2013 Expenses = Net Income (Profit or Loss)\r\n\r\nIn plain English: Money coming in \u2013 Money going out = What you actually made\r\n\r\nThe Three Parts\r\n<ul>\r\n \t<li>Revenue \u2014 all the money the business<span>\u00a0<\/span><em>earned<\/em><span>\u00a0<\/span>from selling products or services, and potentially other income flows (ex: rental income)<\/li>\r\n \t<li>Expenses \u2014 all the costs to<span>\u00a0<\/span><em>run<\/em><span>\u00a0<\/span>the business (rent, salaries, supplies, etc.)<\/li>\r\n \t<li>Net Income \u2014 what\u2019s left over. If it\u2019s positive, you made a profit. If it\u2019s negative, you took a loss.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<h3>Example: Sam\u2019s Sneaker Shop (January)<\/h3>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>REVENUE<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sneaker Sales<\/td>\r\n<td>$20,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Revenue<\/td>\r\n<td>$20,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>EXPENSES<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of goods sold<\/td>\r\n<td>$10,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Rent<\/td>\r\n<td>$2,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Employee Wages<\/td>\r\n<td>$3,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Utilities<\/td>\r\n<td>$500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Expenses<\/td>\r\n<td>$15,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net Income (Profit)<\/td>\r\n<td>$4,500<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSam brought in $20,000 but spent $15,500 keeping the shop running, so he walked away with $4,500 in profit for January.\r\n\r\n&nbsp;\r\n<div class=\"textbox textbox--exercises\"><header class=\"textbox__header\">\r\n<h3><strong>Balance Sheet vs. Income Statement \u2014 What\u2019s the Difference?<\/strong><\/h3>\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\nThink of it this way: the income statement tells you how the game went. The balance sheet tells you where you stand after the game.\r\n\r\nYou need both to get the full picture of a business\u2019s financial health.\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2>Statement of Cash Flows<\/h2>\r\nThe financial statement that identifies a firm\u2019s sources and uses of cash in a given accounting period is the statement of cash flows. If the income statement tells you whether you<span>\u00a0<\/span><em>made<\/em><span>\u00a0<\/span>money, the statement of cash flows tells you whether you actually<span>\u00a0<\/span><em>have<\/em><span>\u00a0<\/span>money. They sound the same, but they\u2019re not.\r\n\r\n\u201cWhere did our cash come from, and where did it go?\u201d\r\n\r\n&nbsp;\r\n<h3>Wait, Isn\u2019t That the Same as Profit?<\/h3>\r\nNot exactly \u2014 and this trips a lot of people up.\r\n\r\nA business can be profitable on paper but still run out of cash. For example, Sam sells $10,000 worth of sneakers to a school on credit. That counts as revenue on the income statement. But if the school hasn\u2019t paid yet, Sam doesn\u2019t actually have that cash in hand. Bills still need to get paid though.\r\n\r\nThat\u2019s why the cash flow statement exists \u2014 it tracks real cash moving in and out.\r\n\r\n&nbsp;\r\n\r\n<span>The Three Parts<\/span>\r\n<ul>\r\n \t<li>Operating Activities \u2014 cash from the everyday business of selling products or services<\/li>\r\n \t<li>Investing Activities \u2014 cash spent on or earned from long term assets (like buying equipment or a building)<\/li>\r\n \t<li>Financing Activities \u2014 cash exchanged with lenders or owners (like taking out a loan or paying it back)<\/li>\r\n<\/ul>\r\n&nbsp;\r\n\r\n<\/div>\r\n&nbsp;\r\n<h3><strong>Simple Example: Sam\u2019s Sneaker Shop (January)<\/strong><\/h3>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>OPERATING ACTIVITIES<\/strong><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash collected from customers<\/td>\r\n<td>$18,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash paid for inventory<\/td>\r\n<td>($8,000)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash paid for rent<\/td>\r\n<td>($2,000)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash paid for wages<\/td>\r\n<td>($3,000)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash paid for utilities<\/td>\r\n<td>($500)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net Cash from Operations<\/td>\r\n<td>$4,500<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>INVESTING ACTIVITIES<\/strong><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Purchased new display shelving<\/td>\r\n<td>($2,000)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net Cash from Investing<\/td>\r\n<td>($2,000)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>FINANCING ACTIVITIES<\/strong><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Loan payment to bank<\/td>\r\n<td>($500)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net Cash from Financing<\/td>\r\n<td>($500)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net Change in Cash<\/td>\r\n<td>$2,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash at Start of January<\/td>\r\n<td>$3,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash at End of January<\/td>\r\n<td>$5,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<em>Are you happy with the\u00a0cash flow trends\u00a0as seen in this statement?<\/em>\r\n\r\n&nbsp;\r\n<div class=\"textbox textbox--key-takeaways\"><header class=\"textbox__header\">\r\n<h2 class=\"textbox__title\">Key Takeaway<\/h2>\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n<h2><strong>The Big Three, Side by Side<\/strong><\/h2>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>Statement<\/strong><\/td>\r\n<td><strong>Answers<\/strong><\/td>\r\n<td><strong>Covers<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Balance Sheet<\/td>\r\n<td>What do we own and owe?<\/td>\r\n<td>One moment in time<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Income Statement<\/td>\r\n<td>Did we make a profit?<\/td>\r\n<td>A period of time<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash Flow Statement<\/td>\r\n<td>Do we actually have cash?<\/td>\r\n<td>A period of time<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nTogether, these three statements give anyone a complete picture of a business\u2019s financial health. Think of them as three different camera angles on the same game.\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<h2>Other Statements<\/h2>\r\nIn addition to the three major financial statements discussed earlier, firms might prepare additional statements described below:\r\n<div class=\"textbox\">\r\n\r\nA<span>\u00a0<\/span><strong>statement of retained earnings<\/strong><span>\u00a0<\/span>shows how retained earnings have changed from one accounting period to the next. It answers one question:\r\n\r\n\u201cHow much profit has the business kept over time?\u201d\r\n\r\nWhen a business makes a profit, the owner has two choices: take the money out (called a dividend or draw) or leave it in the business to help it grow. The money left in the business is called retained earnings. The statement of retained earnings tracks exactly that.\r\n\r\n<\/div>\r\n&nbsp;\r\n<div class=\"textbox\">\r\n\r\nThe<span>\u00a0<\/span><strong>owners\u2019 equity statement<span>\u00a0<\/span><\/strong>shows how net income and dividends affect retained earnings. It also shows changes in common and\/or preferred stock, such as the impact from the issuance of additional shares of stock. (For example, stock can be bought back). Think of this as the \u201cretained earnings statement\u2019s bigger sibling.\u201d It covers the same idea but for companies that have multiple owners through stock rather than just one owner.\r\n\r\n\u201cHow has the ownership value of this company changed over time?\u201d\r\n\r\nWhen a company sells stock, people buy small pieces of ownership called shares. Stockholders\u2019 equity is the total value belonging to all those shareholders combined. It goes up when the company makes money or sells more stock, and it goes down when it loses money or pays out dividends.\r\n\r\nThe ending total equity from this statement flows directly onto the balance sheet under the equity section. It\u2019s the final piece that ties everything together.\r\n\r\n<\/div>\r\n<div class=\"textbox\">\r\n<p data-path-to-node=\"1\"><strong>Comparative Statement Analysis<\/strong><span>\u00a0<\/span>is a way to use a company\u2019s past performance to see how healthy they are today and where they might be going tomorrow.<\/p>\r\n<p data-path-to-node=\"1\">Imagine you\u2019re looking at your grades at the end of the year. Seeing a \u201cB\u201d in Math is okay, but it doesn\u2019t tell the whole story. However, if you look at your grade from last semester (a \u201cC\u201d) and compare it to this semester (a \u201cB\u201d), you can see you\u2019re getting better!<\/p>\r\n<p data-path-to-node=\"2\">Comparative Statement Analysis is basically a report card for a business. Instead of looking at a company\u2019s numbers for just one year, you line them up side-by-side for two or more years. By looking at the numbers next to each other, you can see if the company is growing, staying the same, or headed for trouble.<\/p>\r\n<p data-path-to-node=\"6\">Business owners look at two main things:<\/p>\r\n\r\n<ol start=\"1\" data-path-to-node=\"7\">\r\n \t<li>\r\n<p data-path-to-node=\"7,0,0\">The Dollar Change: How much more (or less) money did we make this year compared to last year?<\/p>\r\n<\/li>\r\n \t<li>\r\n<p data-path-to-node=\"7,1,0\">The Percentage Change: What was the \u201cspeed\u201d of that change? For example, making $1,000 more is great if you\u2019re a lemonade stand (huge growth!), but it\u2019s tiny if you\u2019re Apple.<\/p>\r\n<\/li>\r\n<\/ol>\r\n<p data-path-to-node=\"8\">This analysis is helpful to spot trends (<em>Is the company making more money every single year, or is it starting to drop?<\/em>), check expenses<b data-path-to-node=\"9,1,0\" data-index-in-node=\"0\"><span>\u00a0<\/span>(<\/b><em>Are we spending way more on electricity this year? Why?<\/em>) and predict the future (<em>If a business has grown by 10% every year for five years, it\u2019s a good bet they might do it again next year<\/em>).<\/p>\r\n\r\n<\/div>\r\n&nbsp;\r\n<div class=\"textbox\">\r\n\r\n<strong>Ratio Analysis<\/strong><span>\u00a0<\/span>is another way to look at a business \u201creport card,\u201d but instead of just comparing years, you are comparing different numbers to each other to see how they relate.\r\n\r\nThink of it like batting averages in baseball or fuel efficiency (MPG) in a car. A single number doesn\u2019t tell you much, but when you compare two numbers (like hits vs. at-bats), you get a clear picture of how things are going.\r\n\r\nHow it Works:\u00a0 In business, you take two numbers from a financial report and divide one by the other. This gives you a ratio.\r\n\r\nHere are the three most common things people look for:\r\n<ol>\r\n \t<li>Can we pay our bills? (Liquidity): This compares the cash you have right now to the bills you owe soon. It\u2019s like checking if you have enough money in your pocket to buy lunch today.<\/li>\r\n<\/ol>\r\n2. Are we making a profit? (Profitability): This compares how much money you kept versus how much you sold. If you sold $100 worth of lemonade but spent $90 on lemons and sugar, your profit ratio is pretty low.\r\n\r\n3. Are we using our stuff well? (Efficiency): This looks at how fast you sell your products. If you own a clothing store, you want your clothes to sell quickly so they don\u2019t just sit on the shelves getting dusty.\r\n\r\nWhy is this useful?\r\nRatios make it easy to compare totally different companies.\r\n\r\nImagine a massive pizza chain and a tiny local pizza shop. You can\u2019t compare their total dollars because the big chain will always have more. But, you can compare their Profit Margin percentage. If the small shop keeps 20% of every dollar and the big chain only keeps 10%, the small shop is actually doing a better job of managing its money!\r\n\r\n<\/div>\r\n&nbsp;\r\n<div class=\"textbox textbox--sidebar shaded\">\r\n<h3 data-path-to-node=\"10\">The Simple Breakdown<\/h3>\r\n<ul data-path-to-node=\"11\">\r\n \t<li>\r\n<p data-path-to-node=\"11,0,0\"><b data-path-to-node=\"11,0,0\" data-index-in-node=\"0\">Comparative Analysis<\/b><span>\u00a0<\/span>is like looking at your own height over the last three years to see how much you grew.<\/p>\r\n<\/li>\r\n \t<li>\r\n<p data-path-to-node=\"11,1,0\"><b data-path-to-node=\"11,1,0\" data-index-in-node=\"0\">Ratio Analysis<\/b><span>\u00a0<\/span>is like comparing your height to your weight to see if you are healthy for your size.<\/p>\r\n<\/li>\r\n<\/ul>\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"textbox textbox--key-takeaways\"><header class=\"textbox__header\">\r\n<h2 class=\"textbox__title\">Key Takeaway<\/h2>\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n<h2><strong>The Full Picture: Financial Statements<\/strong><\/h2>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>Statement<\/strong><\/td>\r\n<td><strong>Answers<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Balance Sheet<\/td>\r\n<td>What do we own and owe?<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Income Statement<\/td>\r\n<td>Did we make a profit?<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash Flow Statement<\/td>\r\n<td>Do we actually have cash? What is happening to cash?<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Retained Earnings Statement<\/td>\r\n<td>How much profit did we keep?<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Owners\u2019 Equity Statement\r\n\r\n&nbsp;\r\n\r\nComparative Statement Analysis\r\n\r\n&nbsp;\r\n\r\nRatio Analysis<\/td>\r\n<td>How has total ownership value changed? (including the impact of profits, distributions, owner investments, and changes in common \/ preferred stock)\r\n\r\nWhen comparing this year to last, how much money did we make\/loose (and at what speed)?\r\n\r\n&nbsp;\r\n\r\nCan we pay our bills? Are we making a profit? Are we efficient?<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<span class=\"pullquote-left\">Each one tells a different part of the same story.<\/span>\r\n<div class=\"textbox__content\"><\/div>\r\n<\/div>\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2>The Independent Auditor\u2019s Report<\/h2>\r\nA company\u2019s financial statements need to be put into context. An independent auditor is a certified outside accountant (a CPA firm) that has no connection to the company. They come in, dig through the books, and give an honest opinion on whether the financial statements are accurate.\r\n\r\nU.S. securities laws require publicly traded corporations in the United States to have an independent CPA firm perform an annual external audit of their financial statements. It\u2019s like a seal of approval from an outside expert.\u00a0 For CPA firms to perform audits with integrity, they must be independent of the firms they audit.\r\n\r\nVerifies that financial statements:\r\n<ul>\r\n \t<li>Are prepared in accordance with generally accepted accounting principles<\/li>\r\n \t<li>Fairly present the firm\u2019s financial condition<\/li>\r\n \t<li>Included in the annual report that a firm sends its stockholders<\/li>\r\n<\/ul>\r\n<\/div>\r\n&nbsp;\r\n\r\n<hr \/>\r\n\r\nMost auditor reports issue one of three opinions:\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>Opinion<\/strong><\/td>\r\n<td><strong>What It Means<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Clean (Unqualified)<\/td>\r\n<td>\u201cEverything looks good. The statements are fair and accurate.\u201d<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Qualified<\/td>\r\n<td>\u201cMostly fine, but there\u2019s one specific issue we need to flag.\u201d<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Adverse<\/td>\r\n<td>\u201cThese statements are NOT accurate. Do not trust them.\u201d<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe vast majority of reports are clean opinions. Qualified opinions state that the financial condition of a company is still presented fairly. If a company receives an adverse opinion, that\u2019s a massive red flag for investors.\r\n\r\n<span><strong>*<a href=\"https:\/\/ahacpa.org\/resources\/_free\/sample-financials-UL2-7-2019.pdf\">Sample Opinion<\/a><\/strong><\/span>\r\n\r\n<hr \/>\r\n\r\n<h3><strong>Why Should You Care?<\/strong><\/h3>\r\nRemember the Enron scandal from earlier? Arthur Andersen was supposed to be playing this exact role: the independent outside firm keeping Enron honest. Instead, they looked the other way and helped cover things up.\r\n\r\nThat\u2019s why auditor independence is taken so seriously today. The whole system only works if the auditor genuinely has nothing to gain by lying.\r\n\r\n&nbsp;\r\n\r\n<hr \/>\r\n\r\n<div class=\"textbox\">\r\n<h2>Budgeting<\/h2>\r\nA budget is a management game plan. It lays out how a company expects to get the money it needs and how it plans to spend it over a specific period of time. More than just numbers, a budget forces managers to get specific:\r\n\r\n<em>\u201cWhat exactly are our goals, and what resources do we need to actually achieve them?\u201d<\/em>\r\n\r\n<\/div>\r\n<h3><strong>Why Bother Budgeting?<\/strong><\/h3>\r\nA good budget does four things for a business:\r\n<ul>\r\n \t<li>Plans ahead \u2014 turns big goals into concrete numbers and action steps<\/li>\r\n \t<li>Gets everyone on the same page \u2014 encourages communication between managers and employees<\/li>\r\n \t<li>Motivates people \u2014 gives teams clear targets to work toward<\/li>\r\n \t<li>Measures progress \u2014 lets managers see what\u2019s working and what isn\u2019t<\/li>\r\n<\/ul>\r\n<h3><strong>Two Ways to Build a Budget<\/strong><\/h3>\r\n<ul>\r\n \t<li>Top-Down Budgeting \u2014 upper management creates the budget and hands it down. Fast, but employees may feel left out of the process.<\/li>\r\n \t<li>Bottom-Up (Participatory) Budgeting \u2014 managers and employees at all levels contribute to building the budget. Takes longer, but tends to produce more realistic numbers and better buy-in from the team. This is the more common approach.<\/li>\r\n<\/ul>\r\n<a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/Awesome-Skateboards-12-31-21-Statements-a.xlsx\" target=\"_blank\" rel=\"noopener\">Church Budget Example on Sheet 3<\/a>\r\n\r\n&nbsp;\r\n<div class=\"textbox\">\r\n<h2><strong>The Master Budget<\/strong><\/h2>\r\nA presentation of an organization\u2019s operational and financial budgets is called the master budget. Think of it as the complete financial roadmap for the business: every department, every dollar, all in one place. If the independent auditor\u2019s report is the \u201cseal of approval\u201d on past performance, the master budget is the blueprint for future performance.\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n<hr \/>\r\n\r\n&nbsp;\r\n\r\n<a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/do-you-want-to-make-this-a-career\/\">Do you want to make this a career?<\/a>\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n<a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/dont-want-to-make-this-a-career\/\"><strong>Don\u2019t<\/strong> want to make this a career?<\/a>\r\n\r\n&nbsp;\r\n<div class=\"textbox textbox--exercises\"><header class=\"textbox__header\">\r\n<h1 class=\"textbox__title\"><span style=\"background-color: #ffff00;color: #000000\">EXTRA LEARNING RESOURCES<\/span><\/h1>\r\n<\/header>\r\n<div class=\"textbox__content\">\r\n\r\n<a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/infographic-8\/\">Infographic<\/a>\r\n\r\n<a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/mind-map-8\/\">Mind Map<\/a>\r\n\r\n<a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/video-overview-8\/\">Video Overview<\/a>\r\n\r\n<a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/podcast-8\/\">Podcast<\/a>\r\n\r\n<\/div>\r\n<\/div>\r\n&nbsp;","rendered":"<div style=\"font-weight: 400\">\n<p>Imagine you\u2019re invited to play the most high-stakes poker game in the world. The buy-in is your entire life savings. You sit down, and you realize&#8230; you don&#8217;t know the rules. Everyone else is speaking a language you don&#8217;t understand, and they are taking your money while you smile and nod.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/02\/acct1.jpg\" alt=\"\" width=\"663\" height=\"379\" class=\"alignright wp-image-102 size-full\" style=\"font-size: 18.6667px\" srcset=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/02\/acct1.jpg 663w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/02\/acct1-300x171.jpg 300w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/02\/acct1-65x37.jpg 65w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/02\/acct1-225x129.jpg 225w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/02\/acct1-350x200.jpg 350w\" sizes=\"auto, (max-width: 663px) 100vw, 663px\" \/><\/p>\n<\/div>\n<div style=\"font-weight: 400\">\n<p>In the world of business, that language is\u00a0<strong>Accounting<\/strong>. If you don&#8217;t know it, you aren&#8217;t a player, you\u2019re just a spectator watching someone else spend\u00a0your money. Even if you want to be a YouTuber, a doctor, or a high-end designer, if you can&#8217;t read a profit and loss statement, you&#8217;re just an employee for someone who can.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Accounting aims to provide users with relevant and timely information to help them make good economic decisions.<\/p>\n<p>The Warren Buffett quote. \u201c<em>Accounting is the language of business<\/em>,\u201d emphasizes that you can&#8217;t play the game if you don&#8217;t know how to read the scoreboard. It positions accounting as a vital skill rather than a chore. Essentially, it\u2019s like keeping a detailed record of all the money that comes in and goes out, which helps make better financial decisions.<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h1 style=\"text-align: center\">CHAPTER OUTLINE<\/h1>\n<p style=\"text-align: center\">8.1: Who does it?<\/p>\n<p style=\"text-align: center\">8.2: Branches of Accounting<\/p>\n<p style=\"text-align: center\">8.3: Ethics in Accounting<\/p>\n<p style=\"text-align: center\">8.4: Accounting Terms<\/p>\n<p style=\"text-align: center\">Do you want to make this a career?<\/p>\n<p style=\"text-align: center\">Don\u2019t want to make this a career?<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<hr \/>\n<p>&nbsp;<\/p>\n<header>\n<h1 class=\"entry-title\">8.1 Who does it?<\/h1>\n<\/header>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct2.jpg\" alt=\"\" width=\"624\" height=\"351\" class=\"aligncenter wp-image-115 size-full\" srcset=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct2.jpg 624w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct2-300x169.jpg 300w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct2-65x37.jpg 65w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct2-225x127.jpg 225w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct2-350x197.jpg 350w\" sizes=\"auto, (max-width: 624px) 100vw, 624px\" \/><\/p>\n<p><strong>Public accountants<\/strong>\u00a0prepare tax reports, perform external audits, and give advice to companies.<\/p>\n<p><strong>Management accountants<\/strong>\u00a0assist managers and analyze and prepare reports and financial statements.<\/p>\n<p><strong>Government accountants<\/strong>\u00a0perform different accounting functions for local, state, or federal government agencies.<\/p>\n<p>Accountants need expertise in complex subjects. That is why many of them take certified courses. Certified public accountants (CPAs) are certified to audit the accounting records of public and private organizations and to attest to compliance with generally accepted accounting rules. The offices of CPAs may provide one or more of the following accounting services:<\/p>\n<ul>\n<li>Auditing financial statements<\/li>\n<li>Designing accounting systems<\/li>\n<li>Preparing financial statements<\/li>\n<li>Developing budgets<\/li>\n<li>Providing advice on matters related to accounting<\/li>\n<\/ul>\n<div>\n<p>These establishments may also provide related services, such as bookkeeping, tax return preparation, and payroll processing.<\/p>\n<hr \/>\n<\/div>\n<header>\n<h1 class=\"entry-title\">8.2 Branches of Accounting<\/h1>\n<\/header>\n<p><strong>Financial Accounting<\/strong>\u00a0involves preparing financial statements that help stakeholders understand their firm\u2019s performance through the years and compare the firm\u2019s performance with that of its competitors. Stakeholders need this information to analyze the financial condition of the firm. Investors compare a company\u2019s financial results to other firms in the same industry.\u00a0 The major output of financial accounting (balance sheets, income statements, cash flows) provides fundamental information about a company\u2019s past and future financial performance.<\/p>\n<p><strong>Managerial Accounting<\/strong>\u00a0provides reports and analysis to managers to help them make informed business decisions. A firm\u2019s performance depends on the accuracy and reliability of this information.<\/p>\n<div class=\"textbox textbox--examples\">\n<header class=\"textbox__header\">\n<h3>Think of it this way: A company has two different audiences that need financial information: people inside the company and people outside it. Each audience gets a different type of accounting.<\/h3>\n<\/header>\n<div class=\"textbox__content\">\n<div>\n<p><strong>Financial Accounting<\/strong>\u00a0= Reporting to Outsiders<\/p>\n<p>This is the \u201cofficial\u201d scoreboard. It\u2019s designed for investors, banks, the IRS, and regulators \u2013 people outside the company who want to know: \u201cIs this company healthy? Should I invest or lend money?\u201d<\/p>\n<p>It follows strict rules (called GAAP) so everyone can compare companies apples-to-apples. Think annual reports, balance sheets, income statements. It looks backward, summarizing what has already happened.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Managerial Accounting<\/strong>\u00a0= Reporting to Insiders<\/p>\n<p>This is the internal dashboard. It\u2019s designed for managers and executives who need to make decisions: \u201cShould we launch this product? Where are we losing money? How do we cut costs?\u201d<\/p>\n<p>No strict rules here \u2013 companies report whatever is useful to them. It looks both backward (what happened) and forward (budgets, forecasts, projections).<\/p>\n<\/div>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<p>While a regular accountant looks at your finances to make sure the math adds up and your taxes are paid, a forensic accountant looks at the numbers to find out if someone is lying, stealing, or hiding something.\u00a0<strong>Forensic Accounting<\/strong>\u00a0is a specialized field of accounting that involves investigating financial records to detect fraud, inefficiencies, and government waste. It combines accounting, auditing, and investigative skills to analyze financial data and uncover misconduct. Forensic accountants work in law enforcement, government agencies, corporations, and firms to protect financial integrity.<\/p>\n<div>\n<h2 data-path-to-node=\"13\"><\/h2>\n<h2 data-path-to-node=\"13\"><strong>Key Skills Needed<\/strong><\/h2>\n<p data-path-to-node=\"14\">To do this job, you need a specific \u201ctoolbox\u201d:<\/p>\n<ol start=\"1\" data-path-to-node=\"15\">\n<li>\n<p data-path-to-node=\"15,0,0\">Skepticism: They don\u2019t take any document at face value.<\/p>\n<\/li>\n<li>\n<p data-path-to-node=\"15,1,0\">Attention to Detail: They find the one-cent discrepancy that leads to a million-dollar theft. They need to be able to verify numbers.<\/p>\n<\/li>\n<li>\n<p data-path-to-node=\"15,2,0\">Data Analysis: They use software to scan thousands of transactions in seconds to find patterns.<\/p>\n<\/li>\n<\/ol>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct3.png\" alt=\"A few notable examples of Government Waste Scandals where forensic accounting played a key role in exposing financial misconduct\" width=\"624\" height=\"352\" class=\"alignnone wp-image-114 size-full\" srcset=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct3.png 624w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct3-300x169.png 300w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct3-65x37.png 65w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct3-225x127.png 225w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct3-350x197.png 350w\" sizes=\"auto, (max-width: 624px) 100vw, 624px\" \/><\/p>\n<p><em>These cases show how forensic accounting plays a vital role in ensuring accountability and preventing misuse of taxpayer money.<\/em><\/p>\n<hr \/>\n<p>&nbsp;<\/p>\n<header>\n<h1 class=\"entry-title\">8.3: <strong style=\"font-size: 1.3rem\">Ethics in Accounting<\/strong><\/h1>\n<\/header>\n<p>Real-world companies have collapsed because of \u201ccreative\u201d math. Whether it\u2019s hiding massive debt or faking profits, these scandals prove that accounting isn\u2019t just about numbers\u2014it\u2019s about trust. Because of past disasters, the profession now has a zero-tolerance policy for unethical behavior.<\/p>\n<h2><strong>Who Makes the Rules?<\/strong><\/h2>\n<p>Think of these organizations as the \u201creferees\u201d of the financial world:<\/p>\n<ul>\n<li><strong>The SEC<\/strong>\u00a0(Securities and Exchange Commission): The government agency with the ultimate legal power.<\/li>\n<li><strong>The FASB<\/strong>\u00a0(Financial Accounting Standards Board): The private group the SEC trusts to write the actual rulebook.<\/li>\n<li><strong>GAAP<\/strong>\u00a0(Generally Accepted Accounting Principles): The \u201cground rules\u201d themselves.<\/li>\n<\/ul>\n<p>The Goal of GAAP: To ensure financial statements are clear, honest, and consistent so that everyone, from investors to employees, can trust the data.<\/p>\n<p>&nbsp;<\/p>\n<h2><strong>The \u201cBig Four\u201d Requirements<\/strong><\/h2>\n<p>To follow GAAP, every financial statement must be:<\/p>\n<ul>\n<li>Understandable: It actually helps people see if the company is healthy.<\/li>\n<li>Reliable: Based on objective, verifiable facts (not \u201cgut feelings\u201d)<\/li>\n<li>Consistent: Uses the same math methods year after year.<\/li>\n<li>Comparable: Formatted so you can easily compare a company\u2019s performance over time.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct4.png\" alt=\"Accounting Joke\" width=\"624\" height=\"341\" class=\"aligncenter wp-image-113 size-full\" srcset=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct4.png 624w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct4-300x164.png 300w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct4-65x36.png 65w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct4-225x123.png 225w, https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/acct4-350x191.png 350w\" sizes=\"auto, (max-width: 624px) 100vw, 624px\" \/><\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox textbox--examples\">\n<header class=\"textbox__header\">\n<h2><strong>The Most Famous Accounting Disaster: Enron<\/strong><\/h2>\n<\/header>\n<div class=\"textbox__content\">\n<p>If you\u2019ve never heard of Enron, it\u2019s worth a quick look.\u00a0<a href=\"https:\/\/youtu.be\/jrEf8uabe7E?si=w7eRWdd2tluPS5Wf\">Watch it explained in one minute.<\/a><\/p>\n<p>In short: Enron hid massive debts and faked profits, fooling investors for years. But here\u2019s the kicker \u2014 their accounting firm, Arthur Andersen, actually knew. Instead of blowing the whistle, they helped cover it up, even shredding documents.\u00a0 Arthur Andersen had been in business for 90 years, survived the Great Depression, and employed 85,000 people worldwide. One series of unethical decisions ended all of it.<\/p>\n<p>The lesson? Ethical failures don\u2019t only destroy the people who commit fraud. They take down everyone around them too.<\/p>\n<\/div>\n<\/div>\n<h3><strong>It Can Happen at Any Scale: The Fall of Sam<\/strong><\/h3>\n<p>You don\u2019t need to be at a Fortune 500 company for ethics to matter. Consider Sam.<\/p>\n<p>Sam landed his first accounting internship at a small, cool sneaker company; free shoes, espresso bar, and skateboarding sponsorships. He was thrilled.<\/p>\n<p>One Friday, he was reconciling petty cash and found it was off by exactly $5. He checked everything twice but couldn\u2019t track it down. His stressed supervisor shrugged:\u00a0<em>\u201cJust adjust it. It\u2019s only five bucks.\u201d<\/em><\/p>\n<p>Sam felt uneasy, but he didn\u2019t want to be the intern who made a big deal over nothing. So, he made the adjustment and moved on.<\/p>\n<p>A month later, an internal audit revealed thousands of dollars missing from the same fund. Someone had been skimming small amounts over time, and the fake \u201cadjustments\u201d had been covering the trail. The audit led straight back to Sam\u2019s report.<\/p>\n<p>Sam hadn\u2019t stolen anything. But his signature was on the falsified record, and that was enough. His internship was terminated, and the incident followed him through college.<\/p>\n<p>Sam later said the hardest part wasn\u2019t losing the internship; it was realizing that ethical mistakes don\u2019t always come from greed. Sometimes, they come from going along with something that \u201cseems small.\u201d<\/p>\n<div class=\"textbox textbox--key-takeaways\">\n<header class=\"textbox__header\">\n<h6 class=\"textbox__title\">Key Takeaway<\/h6>\n<\/header>\n<div class=\"textbox__content\">\n<p>In accounting, every dollar counts \u2026. and so does every decision. Ethics isn\u2019t just about avoiding fraud. It\u2019s about having the courage to speak up even when the problem seems minor, especially when someone in authority tells you not to worry about it.<\/p>\n<\/div>\n<\/div>\n<p><span class=\"pullquote-left\">Red flags don\u2019t come with warning labels. That\u2019s why your judgment matters from day one.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><em>*Click here to learn about some current accounting scandals:<\/em><\/p>\n<p><a href=\"https:\/\/www.youtube.com\/shorts\/ysTOv4Csr_Y\">First Brands Group<\/a><\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/www.youtube.com\/shorts\/CZANI4TsQ7Q\">Three of the worst accounting scandals in history\u00a0<\/a><\/p>\n<hr \/>\n<p>&nbsp;<\/p>\n<header>\n<h1 class=\"entry-title\">8.4 Accounting Terms<\/h1>\n<\/header>\n<div class=\"textbox\">\n<h2>Cost<\/h2>\n<p><em>What you give up to get something<\/em><\/p>\n<p>This is broader than just money. When you spend $10 on a pizza, the cost is $10. But if you use your Saturday afternoon to bake one yourself, the cost includes your time too (even if you paid nothing.)<\/p>\n<p>The \u201ccost\u201d of anything is everything you sacrifice to get it.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2>Out-of-Pocket Cost<\/h2>\n<p><em>Money actually leaving your wallet<\/em><\/p>\n<p>This is the straightforward one. You pay cash (or resources) and it\u2019s gone.<\/p>\n<p>Example: You open a coffee shop and pay $2,000\/month in rent, $500 for supplies, and $1,200 in employee wages. All of these are out-of-pocket costs; real dollars flowing out.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2>Implicit Cost<\/h2>\n<p><em>What you gave up that doesn\u2019t show up on a receipt<\/em><\/p>\n<p>It\u2019s the opportunity cost of using your own resources instead of the next best alternative.<\/p>\n<p>Example: You quit your $60,000\/year job to run your own bakery. The bakery earns $50,000 profit. Looks good on paper, but you implicitly lost $60,000 in salary you could have earned. That forgone salary is an implicit cost. Your bakery is actually costing you money when you factor it in.<\/p>\n<p>Another example: You use a building you own for your business instead of renting it out for $1,500\/month. That $1,500 you\u2019re not collecting is an implicit cost.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2>Fixed Costs<\/h2>\n<p><em>Costs that don\u2019t change no matter how much you produce<\/em><\/p>\n<p>These are the bills you pay whether you\u2019re slammed with orders or sitting idle.<\/p>\n<p>Example: Your bakery pays $3,000\/month in rent. It doesn\u2019t matter if you bake 10 cakes or 1,000 cakes that month, rent is still $3,000. Same goes for insurance, equipment loans, or a salaried manager\u2019s pay.<\/p>\n<p>The \u201crelevant range\u201d part just means this holds true within normal operating levels. If you somehow needed to rent a second building, your fixed costs would jump.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2>Variable Costs<\/h2>\n<p><em>Costs that rise and fall with how much you produce<\/em><\/p>\n<p>The more you make, the more these cost. The less you make, the less they cost.<\/p>\n<p>Example: Every cake at your bakery requires flour, eggs, and butter. If you bake 100 cakes, you buy 100 cakes worth of ingredients. If you bake 500 cakes, you buy 5x the ingredients. Labor for hourly workers works the same way: more production means more hours, means more wages.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2><strong>Direct Costs<\/strong><\/h2>\n<p><em>Costs you can point straight at a specific product<\/em><\/p>\n<p>These are easy to trace. You look at a sneaker and say \u201cyep, that cost came from making\u00a0<em>this<\/em>\u00a0shoe specifically.\u201d<\/p>\n<p>Examples:<\/p>\n<ul>\n<li>The leather used to make the shoe \u2192 direct cost<\/li>\n<li>The rubber sole attached to that shoe \u2192 direct cost<\/li>\n<li>The worker hours spent stitching\u00a0<em>that specific<\/em>\u00a0shoe \u2192 direct cost<\/li>\n<\/ul>\n<p>If the cost disappears when you stop making that product, it\u2019s almost certainly a direct cost.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2><strong>Indirect Costs<\/strong><\/h2>\n<p><em>Costs that keep the whole operation running, but can\u2019t be pinned to one product<\/em><\/p>\n<p>These are trickier. They\u2019re real costs, but they benefit\u00a0<em>everything<\/em>\u00a0you make, not just one specific product.<\/p>\n<p>Examples:<\/p>\n<ul>\n<li>The factory\u2019s electricity bill \u2192 powers the whole building, not just one sneaker<\/li>\n<li>The factory manager\u2019s salary \u2192 oversees all products<\/li>\n<li>Rent on the building \u2192 shelters every product you make<\/li>\n<li>Cleaning supplies \u2192 used everywhere<\/li>\n<\/ul>\n<p>You can\u2019t look at a sneaker and say \u201cthis shoe used exactly $4.17 of electricity.\u201d So indirect costs have to be\u00a0<em>estimated and spread across<\/em>\u00a0all your products, which is where things get complicated.<\/p>\n<\/div>\n<div class=\"textbox textbox--examples\">\n<header class=\"textbox__header\">\n<h3 class=\"textbox__title\"><strong>The Problem Indirect Costs Create<\/strong><\/h3>\n<\/header>\n<div class=\"textbox__content\">\n<p>The old simple approach was to just take all indirect costs and spread them evenly across everything you make. For example: \u201cWe spent $100,000 on overhead this year and made 10,000 sneakers, so we\u2019ll assign $10 of overhead to each shoe.\u201d<\/p>\n<p>But what if some sneakers are simple and some are incredibly complex, requiring way more machine time, inspections, and special handling? Spreading costs evenly would make the simple shoe look more expensive than it is, and the complex shoe look\u00a0<em>cheaper<\/em>\u00a0than it is. That leads to bad pricing decisions.<\/p>\n<p>That\u2019s the problem Activity-Based Costing solves.<\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2><strong>Activity-Based Costing (ABC)<\/strong><\/h2>\n<p><em>Assign costs based on what actually drives them<\/em><\/p>\n<p>The idea is simple: costs are caused by activities. Instead of spreading indirect costs evenly, you figure out\u00a0<em>which activities consume resources<\/em>, and then assign costs based on how much of those activities each product actually uses.<\/p>\n<p>The process in plain English:<\/p>\n<ol>\n<li>Identify the activities that cause costs (things like machine setup, quality inspections, shipping, customer service calls, etc.)<\/li>\n<li>Assign costs to each activity; figure out what each activity actually costs the business<\/li>\n<li>Figure out what drives each activity (called a\u00a0<em>cost driver<\/em>)\u00a0 \u2013 for example, machine setups are driven by the\u00a0<em>number of setups<\/em>, inspections are driven by\u00a0<em>number of inspections<\/em>, etc.<\/li>\n<li>Assign costs to products based on how much of each activity\u00a0<em>that product<\/em>\u00a0actually uses<\/li>\n<\/ol>\n<p>The Big Takeaway<\/p>\n<p>Think of it like splitting a dinner bill. The old way is everyone pays equally. ABC is everyone pays for\u00a0<em>what they actually ordered.<\/em>\u00a0It\u2019s fairer, and it leads to smarter business decisions around pricing, which products to push, and where you\u2019re actually making (or losing) money.<\/p>\n<\/div>\n<div class=\"textbox textbox--examples\">\n<header class=\"textbox__header\">\n<h3 class=\"textbox__title\">The McDonald\u2019s Example<\/h3>\n<\/header>\n<div class=\"textbox__content\">\n<p>McDonald\u2019s is actually a perfect real-world case of exactly this problem.<\/p>\n<p><strong>The Setup<\/strong><\/p>\n<p>For decades, McDonald\u2019s tried to compete with places like Subway and Chipotle by adding healthier, more complex items to their menu (salads, wraps, customizable burgers, fruit parfaits, artisan sandwiches.) On paper, these items had decent profit margins. Looked good in the basic accounting reports.<\/p>\n<p><strong>But here\u2019s what the simple cost reporting was hiding:<\/strong><\/p>\n<p>Every time a customer ordered a custom salad or a build-your-own burger, it required:<\/p>\n<ul>\n<li>More ingredients to stock and manage<\/li>\n<li>Longer preparation time<\/li>\n<li>More staff training<\/li>\n<li>More kitchen equipment<\/li>\n<li>Slower drive-through lines (which hurt\u00a0<em>every<\/em>\u00a0customer, not just that one)<\/li>\n<\/ul>\n<p>That last point is huge. A slower drive-through doesn\u2019t just affect the salad, it affects every single burger, fry, and Happy Meal behind it.<\/p>\n<p><strong>What ABC Would Have Revealed<\/strong><\/p>\n<p>If McDonald\u2019s had fully traced the\u00a0<em>activities<\/em>\u00a0those complex menu items were driving (extra prep time, inventory complexity, slower service speed, staff confusion) the true cost of that salad would have looked a lot less attractive.<\/p>\n<p>The simple items like fries, Big Macs, and sodas were carrying indirect costs from the complex items without anyone fully realizing it.<\/p>\n<p><strong>What Actually Happened<\/strong><\/p>\n<p>McDonald\u2019s eventually slashed their menu significantly. They called it a focus on \u201csimplicity and speed.\u201d Franchisee profits went up, drive-through times got faster, and customer satisfaction improved.<\/p>\n<p>They were essentially doing what ABC teaches: realizing that complex products consume far more resources than they appear to on a basic report, and that sometimes your \u201cprofitable\u201d product is secretly cannibalizing your whole operation.<\/p>\n<p><strong>The one-line lesson<\/strong><\/p>\n<p>McDonald\u2019s thought the salad was making them money. The salad was actually slowing down the thing that\u00a0<em>really<\/em>\u00a0made them money: fast, simple, high-volume burgers and fries.<\/p>\n<p>That\u2019s the power of understanding where costs actually come from.<\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2>Financial Statements<\/h2>\n<p>Financial accountants prepare three basic financial statements to show the condition and performance of the business \u2013 the balance sheet, income statement, and statement of cash flows.\u00a0 Provide external stakeholders with a view of an organization\u2019s financial condition.\u00a0<em>Large corporations that publicly trade their stocks must publish an annual report with all three of these statements.<\/em><\/p>\n<p><a href=\"https:\/\/www.youtube.com\/shorts\/tIzBVa8zqto\">Financial Statements Explained Simply<\/a><\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2>The Balance Sheet<\/h2>\n<p>A financial statement that reports the financial position of a firm by identifying and reporting the value of the firm\u2019s assets, liabilities, and owners\u2019 equity is the\u00a0<strong>balance sheet<\/strong>. A balance sheet is basically a financial snapshot of a business at one specific moment in time. It answers one question:<\/p>\n<p>\u201cWhat does this business own, what does it owe, and what\u2019s left over?\u201d<\/p>\n<p>They categorize assets (resources owned by the firm) into\u00a0<em>current assets<\/em>\u00a0(property, plant, and equipment) and\u00a0<em>intangible assets<\/em>\u00a0(brand, identity, intellectual property).<\/p>\n<p>According to the accounting equation, the value of a firm\u2019s assets must equal the sum of the amount of financing provided by owners and financing provided by creditors. In plain English: Everything you own (total assets) = Everything you owe (total liabilities) + What\u2019s actually yours (owner\u2019s equity)<\/p>\n<p>The Three Parts<\/p>\n<p>Assets \u2014 everything the business has (cash, equipment, inventory, buildings)<\/p>\n<p>Liabilities \u2014 everything the business owes (loans, accounts payable, accrued expenses)<\/p>\n<p>Owner\u2019s Equity \u2014 the owner\u2019s investment in the business<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<h3>Example: Sam\u2019s Sneaker Shop<\/h3>\n<table>\n<tbody>\n<tr>\n<td><strong>ASSETS<\/strong><\/td>\n<td><\/td>\n<td><strong>LIABILITIES<\/strong><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash<\/td>\n<td>$5,000<\/td>\n<td>Bank Loan<\/td>\n<td>$8,000<\/td>\n<\/tr>\n<tr>\n<td>Inventory (shoes)<\/td>\n<td>$10,000<\/td>\n<td>Accounts Payable<\/td>\n<td>$2,000<\/td>\n<\/tr>\n<tr>\n<td>Store Equipment<\/td>\n<td>$5,000<\/td>\n<td><strong>Total Liabilities<\/strong><\/td>\n<td><strong>$10,000<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>Total Assets<\/strong><\/td>\n<td><strong>$20,000<\/strong><\/td>\n<td><strong>Owner\u2019s Equity<\/strong><\/td>\n<td><strong>$10,000<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Notice that $20,000 = $10,000 + $10,000. The two sides always balance out, which is exactly why it\u2019s called a\u00a0<em>balance<\/em>\u00a0sheet.<\/p>\n<p>Think of it like this: if Sam\u2019s Sneaker Shop closed today, sold everything it owns ($20,000), and paid off all its debts ($10,000), Sam would walk away with $10,000. That\u2019s his equity.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2>The Income Statement<\/h2>\n<p>The financial statement that reports revenues, expenses, and net income resulting from a firm\u2019s operations over an accounting period is the\u00a0<strong>income statement<\/strong>. Where a balance sheet is a snapshot, an income statement is more like a highlight reel \u2014 it covers a period of time (a month, quarter, or year) and answers one question:<\/p>\n<p>\u201cDid this business actually make money?\u201d<\/p>\n<p>It\u2019s built on one simple equation:<\/p>\n<p>Revenue \u2013 Expenses = Net Income (Profit or Loss)<\/p>\n<p>In plain English: Money coming in \u2013 Money going out = What you actually made<\/p>\n<p>The Three Parts<\/p>\n<ul>\n<li>Revenue \u2014 all the money the business\u00a0<em>earned<\/em>\u00a0from selling products or services, and potentially other income flows (ex: rental income)<\/li>\n<li>Expenses \u2014 all the costs to\u00a0<em>run<\/em>\u00a0the business (rent, salaries, supplies, etc.)<\/li>\n<li>Net Income \u2014 what\u2019s left over. If it\u2019s positive, you made a profit. If it\u2019s negative, you took a loss.<\/li>\n<\/ul>\n<\/div>\n<h3>Example: Sam\u2019s Sneaker Shop (January)<\/h3>\n<table>\n<tbody>\n<tr>\n<td>REVENUE<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Sneaker Sales<\/td>\n<td>$20,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total Revenue<\/td>\n<td>$20,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>EXPENSES<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cost of goods sold<\/td>\n<td>$10,000<\/td>\n<\/tr>\n<tr>\n<td>Rent<\/td>\n<td>$2,000<\/td>\n<\/tr>\n<tr>\n<td>Employee Wages<\/td>\n<td>$3,000<\/td>\n<\/tr>\n<tr>\n<td>Utilities<\/td>\n<td>$500<\/td>\n<\/tr>\n<tr>\n<td>Total Expenses<\/td>\n<td>$15,500<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Net Income (Profit)<\/td>\n<td>$4,500<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Sam brought in $20,000 but spent $15,500 keeping the shop running, so he walked away with $4,500 in profit for January.<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox textbox--exercises\">\n<header class=\"textbox__header\">\n<h3><strong>Balance Sheet vs. Income Statement \u2014 What\u2019s the Difference?<\/strong><\/h3>\n<\/header>\n<div class=\"textbox__content\">\n<p>Think of it this way: the income statement tells you how the game went. The balance sheet tells you where you stand after the game.<\/p>\n<p>You need both to get the full picture of a business\u2019s financial health.<\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2>Statement of Cash Flows<\/h2>\n<p>The financial statement that identifies a firm\u2019s sources and uses of cash in a given accounting period is the statement of cash flows. If the income statement tells you whether you\u00a0<em>made<\/em>\u00a0money, the statement of cash flows tells you whether you actually\u00a0<em>have<\/em>\u00a0money. They sound the same, but they\u2019re not.<\/p>\n<p>\u201cWhere did our cash come from, and where did it go?\u201d<\/p>\n<p>&nbsp;<\/p>\n<h3>Wait, Isn\u2019t That the Same as Profit?<\/h3>\n<p>Not exactly \u2014 and this trips a lot of people up.<\/p>\n<p>A business can be profitable on paper but still run out of cash. For example, Sam sells $10,000 worth of sneakers to a school on credit. That counts as revenue on the income statement. But if the school hasn\u2019t paid yet, Sam doesn\u2019t actually have that cash in hand. Bills still need to get paid though.<\/p>\n<p>That\u2019s why the cash flow statement exists \u2014 it tracks real cash moving in and out.<\/p>\n<p>&nbsp;<\/p>\n<p>The Three Parts<\/p>\n<ul>\n<li>Operating Activities \u2014 cash from the everyday business of selling products or services<\/li>\n<li>Investing Activities \u2014 cash spent on or earned from long term assets (like buying equipment or a building)<\/li>\n<li>Financing Activities \u2014 cash exchanged with lenders or owners (like taking out a loan or paying it back)<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<h3><strong>Simple Example: Sam\u2019s Sneaker Shop (January)<\/strong><\/h3>\n<table>\n<tbody>\n<tr>\n<td><strong>OPERATING ACTIVITIES<\/strong><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash collected from customers<\/td>\n<td>$18,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash paid for inventory<\/td>\n<td>($8,000)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash paid for rent<\/td>\n<td>($2,000)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash paid for wages<\/td>\n<td>($3,000)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash paid for utilities<\/td>\n<td>($500)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Net Cash from Operations<\/td>\n<td>$4,500<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><strong>INVESTING ACTIVITIES<\/strong><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Purchased new display shelving<\/td>\n<td>($2,000)<\/td>\n<\/tr>\n<tr>\n<td>Net Cash from Investing<\/td>\n<td>($2,000)<\/td>\n<\/tr>\n<tr>\n<td><strong>FINANCING ACTIVITIES<\/strong><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Loan payment to bank<\/td>\n<td>($500)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Net Cash from Financing<\/td>\n<td>($500)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Net Change in Cash<\/td>\n<td>$2,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash at Start of January<\/td>\n<td>$3,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cash at End of January<\/td>\n<td>$5,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><em>Are you happy with the\u00a0cash flow trends\u00a0as seen in this statement?<\/em><\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox textbox--key-takeaways\">\n<header class=\"textbox__header\">\n<h2 class=\"textbox__title\">Key Takeaway<\/h2>\n<\/header>\n<div class=\"textbox__content\">\n<h2><strong>The Big Three, Side by Side<\/strong><\/h2>\n<table>\n<tbody>\n<tr>\n<td><strong>Statement<\/strong><\/td>\n<td><strong>Answers<\/strong><\/td>\n<td><strong>Covers<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Balance Sheet<\/td>\n<td>What do we own and owe?<\/td>\n<td>One moment in time<\/td>\n<\/tr>\n<tr>\n<td>Income Statement<\/td>\n<td>Did we make a profit?<\/td>\n<td>A period of time<\/td>\n<\/tr>\n<tr>\n<td>Cash Flow Statement<\/td>\n<td>Do we actually have cash?<\/td>\n<td>A period of time<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Together, these three statements give anyone a complete picture of a business\u2019s financial health. Think of them as three different camera angles on the same game.<\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<h2>Other Statements<\/h2>\n<p>In addition to the three major financial statements discussed earlier, firms might prepare additional statements described below:<\/p>\n<div class=\"textbox\">\n<p>A\u00a0<strong>statement of retained earnings<\/strong>\u00a0shows how retained earnings have changed from one accounting period to the next. It answers one question:<\/p>\n<p>\u201cHow much profit has the business kept over time?\u201d<\/p>\n<p>When a business makes a profit, the owner has two choices: take the money out (called a dividend or draw) or leave it in the business to help it grow. The money left in the business is called retained earnings. The statement of retained earnings tracks exactly that.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<p>The\u00a0<strong>owners\u2019 equity statement\u00a0<\/strong>shows how net income and dividends affect retained earnings. It also shows changes in common and\/or preferred stock, such as the impact from the issuance of additional shares of stock. (For example, stock can be bought back). Think of this as the \u201cretained earnings statement\u2019s bigger sibling.\u201d It covers the same idea but for companies that have multiple owners through stock rather than just one owner.<\/p>\n<p>\u201cHow has the ownership value of this company changed over time?\u201d<\/p>\n<p>When a company sells stock, people buy small pieces of ownership called shares. Stockholders\u2019 equity is the total value belonging to all those shareholders combined. It goes up when the company makes money or sells more stock, and it goes down when it loses money or pays out dividends.<\/p>\n<p>The ending total equity from this statement flows directly onto the balance sheet under the equity section. It\u2019s the final piece that ties everything together.<\/p>\n<\/div>\n<div class=\"textbox\">\n<p data-path-to-node=\"1\"><strong>Comparative Statement Analysis<\/strong>\u00a0is a way to use a company\u2019s past performance to see how healthy they are today and where they might be going tomorrow.<\/p>\n<p data-path-to-node=\"1\">Imagine you\u2019re looking at your grades at the end of the year. Seeing a \u201cB\u201d in Math is okay, but it doesn\u2019t tell the whole story. However, if you look at your grade from last semester (a \u201cC\u201d) and compare it to this semester (a \u201cB\u201d), you can see you\u2019re getting better!<\/p>\n<p data-path-to-node=\"2\">Comparative Statement Analysis is basically a report card for a business. Instead of looking at a company\u2019s numbers for just one year, you line them up side-by-side for two or more years. By looking at the numbers next to each other, you can see if the company is growing, staying the same, or headed for trouble.<\/p>\n<p data-path-to-node=\"6\">Business owners look at two main things:<\/p>\n<ol start=\"1\" data-path-to-node=\"7\">\n<li>\n<p data-path-to-node=\"7,0,0\">The Dollar Change: How much more (or less) money did we make this year compared to last year?<\/p>\n<\/li>\n<li>\n<p data-path-to-node=\"7,1,0\">The Percentage Change: What was the \u201cspeed\u201d of that change? For example, making $1,000 more is great if you\u2019re a lemonade stand (huge growth!), but it\u2019s tiny if you\u2019re Apple.<\/p>\n<\/li>\n<\/ol>\n<p data-path-to-node=\"8\">This analysis is helpful to spot trends (<em>Is the company making more money every single year, or is it starting to drop?<\/em>), check expenses<b data-path-to-node=\"9,1,0\" data-index-in-node=\"0\">\u00a0(<\/b><em>Are we spending way more on electricity this year? Why?<\/em>) and predict the future (<em>If a business has grown by 10% every year for five years, it\u2019s a good bet they might do it again next year<\/em>).<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<p><strong>Ratio Analysis<\/strong>\u00a0is another way to look at a business \u201creport card,\u201d but instead of just comparing years, you are comparing different numbers to each other to see how they relate.<\/p>\n<p>Think of it like batting averages in baseball or fuel efficiency (MPG) in a car. A single number doesn\u2019t tell you much, but when you compare two numbers (like hits vs. at-bats), you get a clear picture of how things are going.<\/p>\n<p>How it Works:\u00a0 In business, you take two numbers from a financial report and divide one by the other. This gives you a ratio.<\/p>\n<p>Here are the three most common things people look for:<\/p>\n<ol>\n<li>Can we pay our bills? (Liquidity): This compares the cash you have right now to the bills you owe soon. It\u2019s like checking if you have enough money in your pocket to buy lunch today.<\/li>\n<\/ol>\n<p>2. Are we making a profit? (Profitability): This compares how much money you kept versus how much you sold. If you sold $100 worth of lemonade but spent $90 on lemons and sugar, your profit ratio is pretty low.<\/p>\n<p>3. Are we using our stuff well? (Efficiency): This looks at how fast you sell your products. If you own a clothing store, you want your clothes to sell quickly so they don\u2019t just sit on the shelves getting dusty.<\/p>\n<p>Why is this useful?<br \/>\nRatios make it easy to compare totally different companies.<\/p>\n<p>Imagine a massive pizza chain and a tiny local pizza shop. You can\u2019t compare their total dollars because the big chain will always have more. But, you can compare their Profit Margin percentage. If the small shop keeps 20% of every dollar and the big chain only keeps 10%, the small shop is actually doing a better job of managing its money!<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<div class=\"textbox textbox--sidebar shaded\">\n<h3 data-path-to-node=\"10\">The Simple Breakdown<\/h3>\n<ul data-path-to-node=\"11\">\n<li>\n<p data-path-to-node=\"11,0,0\"><b data-path-to-node=\"11,0,0\" data-index-in-node=\"0\">Comparative Analysis<\/b>\u00a0is like looking at your own height over the last three years to see how much you grew.<\/p>\n<\/li>\n<li>\n<p data-path-to-node=\"11,1,0\"><b data-path-to-node=\"11,1,0\" data-index-in-node=\"0\">Ratio Analysis<\/b>\u00a0is like comparing your height to your weight to see if you are healthy for your size.<\/p>\n<\/li>\n<\/ul>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox textbox--key-takeaways\">\n<header class=\"textbox__header\">\n<h2 class=\"textbox__title\">Key Takeaway<\/h2>\n<\/header>\n<div class=\"textbox__content\">\n<h2><strong>The Full Picture: Financial Statements<\/strong><\/h2>\n<table>\n<tbody>\n<tr>\n<td><strong>Statement<\/strong><\/td>\n<td><strong>Answers<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Balance Sheet<\/td>\n<td>What do we own and owe?<\/td>\n<\/tr>\n<tr>\n<td>Income Statement<\/td>\n<td>Did we make a profit?<\/td>\n<\/tr>\n<tr>\n<td>Cash Flow Statement<\/td>\n<td>Do we actually have cash? What is happening to cash?<\/td>\n<\/tr>\n<tr>\n<td>Retained Earnings Statement<\/td>\n<td>How much profit did we keep?<\/td>\n<\/tr>\n<tr>\n<td>Owners\u2019 Equity Statement<\/p>\n<p>&nbsp;<\/p>\n<p>Comparative Statement Analysis<\/p>\n<p>&nbsp;<\/p>\n<p>Ratio Analysis<\/td>\n<td>How has total ownership value changed? (including the impact of profits, distributions, owner investments, and changes in common \/ preferred stock)<\/p>\n<p>When comparing this year to last, how much money did we make\/loose (and at what speed)?<\/p>\n<p>&nbsp;<\/p>\n<p>Can we pay our bills? Are we making a profit? Are we efficient?<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p><span class=\"pullquote-left\">Each one tells a different part of the same story.<\/span><\/p>\n<div class=\"textbox__content\"><\/div>\n<\/div>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2>The Independent Auditor\u2019s Report<\/h2>\n<p>A company\u2019s financial statements need to be put into context. An independent auditor is a certified outside accountant (a CPA firm) that has no connection to the company. They come in, dig through the books, and give an honest opinion on whether the financial statements are accurate.<\/p>\n<p>U.S. securities laws require publicly traded corporations in the United States to have an independent CPA firm perform an annual external audit of their financial statements. It\u2019s like a seal of approval from an outside expert.\u00a0 For CPA firms to perform audits with integrity, they must be independent of the firms they audit.<\/p>\n<p>Verifies that financial statements:<\/p>\n<ul>\n<li>Are prepared in accordance with generally accepted accounting principles<\/li>\n<li>Fairly present the firm\u2019s financial condition<\/li>\n<li>Included in the annual report that a firm sends its stockholders<\/li>\n<\/ul>\n<\/div>\n<p>&nbsp;<\/p>\n<hr \/>\n<p>Most auditor reports issue one of three opinions:<\/p>\n<table>\n<tbody>\n<tr>\n<td><strong>Opinion<\/strong><\/td>\n<td><strong>What It Means<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Clean (Unqualified)<\/td>\n<td>\u201cEverything looks good. The statements are fair and accurate.\u201d<\/td>\n<\/tr>\n<tr>\n<td>Qualified<\/td>\n<td>\u201cMostly fine, but there\u2019s one specific issue we need to flag.\u201d<\/td>\n<\/tr>\n<tr>\n<td>Adverse<\/td>\n<td>\u201cThese statements are NOT accurate. Do not trust them.\u201d<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The vast majority of reports are clean opinions. Qualified opinions state that the financial condition of a company is still presented fairly. If a company receives an adverse opinion, that\u2019s a massive red flag for investors.<\/p>\n<p><strong>*<a href=\"https:\/\/ahacpa.org\/resources\/_free\/sample-financials-UL2-7-2019.pdf\">Sample Opinion<\/a><\/strong><\/p>\n<hr \/>\n<h3><strong>Why Should You Care?<\/strong><\/h3>\n<p>Remember the Enron scandal from earlier? Arthur Andersen was supposed to be playing this exact role: the independent outside firm keeping Enron honest. Instead, they looked the other way and helped cover things up.<\/p>\n<p>That\u2019s why auditor independence is taken so seriously today. The whole system only works if the auditor genuinely has nothing to gain by lying.<\/p>\n<p>&nbsp;<\/p>\n<hr \/>\n<div class=\"textbox\">\n<h2>Budgeting<\/h2>\n<p>A budget is a management game plan. It lays out how a company expects to get the money it needs and how it plans to spend it over a specific period of time. More than just numbers, a budget forces managers to get specific:<\/p>\n<p><em>\u201cWhat exactly are our goals, and what resources do we need to actually achieve them?\u201d<\/em><\/p>\n<\/div>\n<h3><strong>Why Bother Budgeting?<\/strong><\/h3>\n<p>A good budget does four things for a business:<\/p>\n<ul>\n<li>Plans ahead \u2014 turns big goals into concrete numbers and action steps<\/li>\n<li>Gets everyone on the same page \u2014 encourages communication between managers and employees<\/li>\n<li>Motivates people \u2014 gives teams clear targets to work toward<\/li>\n<li>Measures progress \u2014 lets managers see what\u2019s working and what isn\u2019t<\/li>\n<\/ul>\n<h3><strong>Two Ways to Build a Budget<\/strong><\/h3>\n<ul>\n<li>Top-Down Budgeting \u2014 upper management creates the budget and hands it down. Fast, but employees may feel left out of the process.<\/li>\n<li>Bottom-Up (Participatory) Budgeting \u2014 managers and employees at all levels contribute to building the budget. Takes longer, but tends to produce more realistic numbers and better buy-in from the team. This is the more common approach.<\/li>\n<\/ul>\n<p><a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-content\/uploads\/sites\/209\/2026\/03\/Awesome-Skateboards-12-31-21-Statements-a.xlsx\" target=\"_blank\" rel=\"noopener\">Church Budget Example on Sheet 3<\/a><\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox\">\n<h2><strong>The Master Budget<\/strong><\/h2>\n<p>A presentation of an organization\u2019s operational and financial budgets is called the master budget. Think of it as the complete financial roadmap for the business: every department, every dollar, all in one place. If the independent auditor\u2019s report is the \u201cseal of approval\u201d on past performance, the master budget is the blueprint for future performance.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<hr \/>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/do-you-want-to-make-this-a-career\/\">Do you want to make this a career?<\/a><\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/dont-want-to-make-this-a-career\/\"><strong>Don\u2019t<\/strong> want to make this a career?<\/a><\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox textbox--exercises\">\n<header class=\"textbox__header\">\n<h1 class=\"textbox__title\"><span style=\"background-color: #ffff00;color: #000000\">EXTRA LEARNING RESOURCES<\/span><\/h1>\n<\/header>\n<div class=\"textbox__content\">\n<p><a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/infographic-8\/\">Infographic<\/a><\/p>\n<p><a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/mind-map-8\/\">Mind Map<\/a><\/p>\n<p><a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/video-overview-8\/\">Video Overview<\/a><\/p>\n<p><a href=\"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/part\/podcast-8\/\">Podcast<\/a><\/p>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n","protected":false},"author":583,"menu_order":7,"template":"","meta":{"pb_show_title":"on","pb_short_title":"Accounting ","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[60],"license":[],"class_list":["post-58","chapter","type-chapter","status-publish","hentry","contributor-kpparagios"],"part":3,"_links":{"self":[{"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/pressbooks\/v2\/chapters\/58","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/wp\/v2\/users\/583"}],"version-history":[{"count":18,"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/pressbooks\/v2\/chapters\/58\/revisions"}],"predecessor-version":[{"id":1149,"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/pressbooks\/v2\/chapters\/58\/revisions\/1149"}],"part":[{"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/pressbooks\/v2\/parts\/3"}],"metadata":[{"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/pressbooks\/v2\/chapters\/58\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/wp\/v2\/media?parent=58"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/pressbooks\/v2\/chapter-type?post=58"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/wp\/v2\/contributor?post=58"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.ulib.csuohio.edu\/business-essentials-for-future-professionals\/wp-json\/wp\/v2\/license?post=58"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}