Unit 4: Accounting, Finance, and Banking
Every day, business owners make financial decisions that will affect every phase of the business operation, such as payroll, cash flow, and projecting future growth. A thorough understanding of accounting and financial management allows business owners to find the best sources and use of funds. For example, you can derive an accurate measure of the health of your business from the income statement, balance sheets, and financial ratios. We investigate financing options, how to analyze credit, and the time value of money. We also examine how banks, such as the U.S. Federal Reserve Bank, affect the ability of businesses to obtain financing.
Completing this unit should take you approximately 15 hours.
Upon successful completion of this unit, you will be able to:
- describe the role of accounting and finance in the business process;
- describe and analyze components of the income statement and balance sheet;
- differentiate among key financial ratios for making business decisions, including profit margin, return on equity, and debt to equity ratio;
- assess the implications of financial ratios for the future performance of a company;
- describe the roles of the Federal Reserve, banks, interest rates, and credit analysis in respect to decisions of financial lending;
- describe different options for financing;
- list and explain the tools available to the Federal Reserve during financial crises;
- analyze the causes and implications of the 2008 financial meltdown; and
- calculate the time value of money.
4.1: Business Accounting
- Read pages 206–207 to get an overview of accounting and the financial statements used by managers and financiers to determine the financial health of a business.
Read the Chapter 12 introduction and section 12.1 to learn the difference between managerial and financial accounting.
4.1.1: Understanding Financial Statements
Read section 12.2 from Exploring Business for an overview of the functions of the basic financial statements: income statement, balance sheet, and statement of owner's equity. These documents serve as guidelines for making intelligent business decisions.
4.2: Components of an Income Statement
Let's look at the income statement in more detail. Read pages 208–209. The income statement shows sales, expenses, and net profit or net loss.
4.2.1: Key Financial Ratios
- Read pages 211–213 for more information on income statement analysis.
Read sections 12.3 and 12.4 to learn how to evaluate your company's success based on the income statement and ratio analysis. In section 12.3, focus on the income statement and work through the business scenario with the College Shop, which will allow you to determine if this company actually made any money.
4.3: Components of a Balance Sheet
Now, it's time to take a closer look at the balance sheet. The balance sheet provides information about what a business owns and what it owes.
4.3.1: Assets, Liabilities, and Stockholders' Equity
- Read pages 210–211 for more on assets and liabilities.
Review "How Do Financial Statements Relate to One Another?" and the key takeaways in Section 12.2. Then, read "Ratio Analysis" in section 12.4.
4.3.2: Key Financial Ratios Using the Balance Sheet
Working independently, complete the assignment on pages 234–240, where you will perform a financial analysis on one retail company based on the given financial statements. As you work, try to answer the following questions:
- What is the main purpose of completing ratio analysis using any firm's financial statement?
- What are the categories of financial ratios?
- It is important to remember that financial ratio guidelines may be different for one industry as compared to another.
- What is the main purpose of completing ratio analysis using any firm's financial statement?
4.4: Financial Ratio Analysis
Now that you've had a chance to look at the income statement and balance sheets and see some of the financial ratios that can be calculated from the individual statements, let's take a look at profitability ratios that can be developed by using data from both statements.
Read pages 214–220 and pay attention to the profit margin, return on equity, and debt to equity ratios.
4.5: The Role of Banks in Finance
In order to succeed in managing their finances, business owners must understand how the banking system works – specifically, the role the Federal Reserve plays.
Read this overview of the Federal Reserve. Then, review section 13.2 in the textbook. What were the causes of the 2008 banking crisis? What does the FDIC do for you if you deposit your money in a bank? Are savings, loans, and credit unions part of the banking system?
4.5.1 The Role of the Federal Reserve
To get a better understanding of the Federal Reserve, read pages 220–223.
Read this section and focus on the definition of the Fed in the first paragraph.
Watch these two videos to bring it all together.
4.5.2: The Federal Reserve and Interest Rates
Review this section and focus on the reserve requirements. What are the three tools used by the Federal Reserve System to regulate the money supply in the United States? How does the usage of these three tools affect you as a consumer? Who is at the head of the Federal Reserve Board?
4.5.3: The Federal Reserve's Involvement in the Recent Financial Crisis
Working independently, complete the assignment on page 245. Review the timeline and video. In an essay of 900–1,200 words, answer the questions in the instructions.
If you wish, you may use this space to answer the textbook questions from the previous resource in a 900–1,200 word essay.
4.5.4: The Federal Reserve's Monetary Tools
Look over this overview of the Federal Reserve today.
Review section 13.3, focusing on the tools of the Fed.
4.6: Finance Considerations
4.6.1: Financing Options
Let's bring the discussion back to owning and operating a business. How do businesses get the money to operate? There are a variety of financing options ranging from owner equity financing to a myriad of debt financing options.
Read this section to see where businesses can get capital to start up and operate their businesses.
Read this section to take a closer look at equity financing in the form of buying and selling stocks.
Finally, read this section to look at the advantages and disadvantages of equity and debt financing.
4.6.2: Credit Analysis
It's all well and good to know the difference between debt and equity financing, but businesses (and individuals) must understand what lenders are looking for in terms of creditworthiness.
Review the section on credit analysis on pages 225–227. Then, complete the assignment on page 242.
4.6.3: The Time Value of Money
Another consideration for whether or not a business should participate in investment or financing activities is the time value of money.
Take a moment to review pages 228–230. Then, complete the assignment on pages 243–244.
4.6.4: Personal Finances
This unit wouldn't be complete without giving you a look at how individuals manage their money. Read this chapter to see how you might be able to give advice to someone who has too much debt or whose monthly bills are too high.
Unit 4 Assessment
- Receive a grade
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.
