As this chapter suggests, the figures in a company's financial statements may look cut-and-dried, but they can tell an interesting story about why some companies are more profitable than others. The accounting function plays a major role when it comes to providing managers with the information they need to build and sustain a successful business model. All the different financial ratios used to measure performance highlight different aspects of a company's performance. They all point to better ways that value can be created and a company's performance improved. This chapter made the following major points:

1. Accounting is the process of (1) collecting, measuring, and recording raw financial data; (2) organizing this data using agreed-upon accounting rules and methods to create useful information about a company's financial performance; and (3) analyzing this information and communicating the results of this analysis in financial reports and statements.
2. All of a company's stakeholders are vitally interested in the financial statements that result from the work of the accounting function—and the manner in which accountants follow agreed-upon accounting rules and standards to prepare those statements. The information provided in these statements allows both inside and outside stakeholders to evaluate its performance.
3. To ensure that a company reports financial information in an accurate and honest way, all U.S. companies must prepare their financial statements according to generally accepted accounting principles (GAAP), a set of rules and procedures developed over time by accounting experts.
4. Companies employ two kinds of accountants—inside and outside accountants. Internal accountants called auditors scrutinize the financial data used to prepare the company's accounts to ensure revenue and expense figures are accurately reported in accordance with GAAP. External auditors then evaluate the accuracy of the work performed by the company's internal auditors to ensure they reported the firm's financial statements in a way that provides a true picture of its operating performance.
5. The three main kinds of financial statement are a company's balance sheet (or statement of financial condition), its income statement, and its statement of cash flows.
6. The balance sheet is a summary of the financial position of a business at the end of the day of a specific reporting period, such as December 31, 2003. The balance sheet reports the main types of assets owned by a company, its liabilities or what it owes, and its stockholders' equity or what it is worth. This is why the balance sheet is sometimes referred to as a statement of financial condition. The basic equation of accounting is that what a company owns, minus what it owes, is what it is worth or Assets – Liabilities = Owners' Equity.
7. The purpose of the income statement is to summarize and report the results of a company's profit-making activities in a specific time period (hence, it is sometimes called the profit and loss statement). The basic equation used to compute a company's bottom-line profit, the amount of net income or profit a company reports on the bottom line of its income statement, is Revenues – Expenses = Profit (or Loss).
8. A company's cash flow must be managed to ensure the firm's short-term and long-term survival. The statement of cash flows shows how much cash a company generates during a specific financial period, where it came from, and how the company used it. In accounting, cash refers to the value of a company's assets that can be converted into cash immediately.
9. Together, the balance sheet, the income statement, and the statement of cash flows provide stakeholders with the information they need to analyze a company's financial situation and the way in which its assets, liabilities, equity, profit, and cash are increasing or decreasing.
10. Financial ratios are useful because they benchmark the company's performance (1) over time and (2) against the performance of other companies.
11. The three main types of financial ratios used to calculate a company's performance are liquidity ratios, asset management ratios, and profitability ratios.
12. Liquidity ratios measure a company's ability to pay its bills when they are due; they are a vital short-term measure of a company performance. Two important liquidity ratios are the current ratio and quick ratio.
13. Asset management ratios do not measure how much profit or cash is generated; they measure whether or not managers have created a business model that will give it the ability to efficiently generate increasing profits over time.
14. Several different profitability ratios can be used to measure a company's financial performance. Each ratio relates a company's profits to some other piece of financial information such as sales or equity to measure how effectively managers are using a company's capital to create profit and cash.
15. Return on invested capital (ROIC) is the ratio most financial analysts use to get a good picture of a company's present and future profitability. A company's ROIC is calculated by dividing its net income or profit by the total capital invested in the business.