Overview of Key Elements of the Business

Business Stakeholders: Internal and External

A stakeholder is an individual or group that has a legitimate interest in a company.

Learning Objectives

Discuss what a business stakeholder is and how they interact with the company

Key Takeaways

Key Points

  • A corporate stakeholder is a person or group who can affect or be affected by the actions of a business.
  • Internal stakeholders are entities within a business (e.g., employees, managers, the board of directors, investors).
  • External stakeholders are entities not within a business itself but who care about or are affected by its performance (e.g., consumers, regulators, investors, suppliers).

Key Terms

  • corporate stakeholder: A corporate stakeholder is that which can affect or be affected by the actions of the business as a whole.

A corporate stakeholder is an individual or group who can affect or be affected by the actions of a business. The stakeholder concept was first used in a 1963 internal memorandum at the Stanford Research Institute. It defined stakeholders as “those groups without whose support the organization would cease to exist. “

In the last decades of the 20th century, the word “stakeholder” has become more commonly used to refer to a person or group that has a legitimate interest in a project or entity. In discussing the decision-making process for institutions—including large business corporations, government agencies, and non- profit organizations — the concept has been broadened to include everyone with an interest (or “stake”) in what the entity does.

Internal stakeholders are entities within a business (e.g., employees, managers, the board of directors, investors). Employees want to earn money and stay employed. Owners are interested in maximizing the profit the business makes. Investors are concerned about earning income from their investment.

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Stakeholders: The picture shows the typical stakeholders of a company. The stakeholders are divided in internal and external stakeholders.

External stakeholders are entities not within a business itself but who care about or are affected by its performance (e.g., consumers, regulators, investors, suppliers). The government wants the business to pay taxes, employ more people, follow laws, and truthfully report its financial conditions. Customers want the business to provide high-quality goods or services at low cost. Suppliers want the business to continue to purchase from them. Creditors want to be repaid on time and in full. The community wants the business to contribute positively to its local environment and population.

Activities of the Business: Financing, Investing, and Operating

Activities of the business include operating activities and non-operating activities such as investing activities, and financing activities.

Learning Objectives

Identify the difference between the three types of business activities

Key Takeaways

Key Points

  • Operating activities include the production, sales, and delivery of the company’s product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product.
  • Investing activities include purchases or sales of an asset (assets can be land, building, equipment, marketable securities, etc.), loans made to suppliers or received from customers, payments related to mergers and acquisitions, and dividends received.
  • Financing activities include the inflow of cash from investors, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities.

Key Terms

  • fundamental: A leading or primary principle, rule, law, or article, which serves as the groundwork of a system; essential part, as, the fundamentals of linear algebra.
  • operating activities: the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities

Activities of the business include operating activities, investing activities, and financing activities.

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Business activities: Business activities include operating, investing and financing activities.

Operating activities, or the fundamental activities the business engages in can include the production, sales, and delivery of the company’s product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product. Under GAAP, operating cash flows include:

  • Receipts from the sale of goods or services
  • Receipts for the sale of loans
  • Debt or equity instruments in a trading portfolio
  • Interest received on loans
  • Payments to suppliers for goods and services
  • Payments to employees or on behalf of employees
  • Interest payments (alternatively, this can be reported under financing activities in IAS 7 and US GAAP)
  • Buying merchandise.

In addition to operating activities businesses engage in non-operating activities. Non-operating activities are not related to the day-to-day, ongoing operations of a business. Non-operating cash flows include borrowings, the issuance or purchase of stock, asset sales, dividend payments, and other investment activity.

Some examples of non-operating activities include:

Investing activities include purchases or sales of an asset (assets can be land, building, equipment, marketable securities, etc.), loans made to suppliers or received from customers, payments related to mergers and acquisitions, and dividends received.

Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities.

As with operating activities GAAP principles dictate how non-operating items are classified on the statement of cash flows.

The Role of Accounting in the Business

The role of accounting in business is to help internal and external stakeholders make better business decisions by providing them with financial information.

Learning Objectives

Explain the importance of accounting for a business

Key Takeaways

Key Points

  • Accounting communicates information that owners, managers, and investors need to evaluate a company’s financial performance.
  • Accountants typically work in one of two major fields: management accounting, which helps you keep your business running, or financial accounting, which tells you how well you’re running it.
  • The purpose of management accounting is to supply relevant, accurate, timely information to managers in a format that will aid them in making decisions.
  • The purpose of financial accounting is to provide information that helps with the assessment of a firm’s financial history and current performance.
  • Financial accounting includes income statements, balance sheets, and statements of cash flows.

Key Terms

  • financial accounting: Furnishes information to individuals and groups both inside and outside an organization to help them assess the firm’s financial history and performance.

Accounting is often called “the language of business.” Why? Because it communicates so much of the information that owners, managers, and investors need to evaluate a company’s financial performance. These people are all stakeholders in the business, which is to say they’re interested in its activities because they’re affected by them. 

In fact, the purpose of accounting is to help stakeholders make better business decisions by providing them with financial information. Obviously, you wouldn’t try to run an organization or make investment decisions without accurate and timely financial information, and it’s the accountant who prepares this information. 

More importantly, accountants make sure that stakeholders understand the meaning of financial information, and they work with both individuals and organizations to help them use financial information to deal with business problems. 

Actually, collecting all the numbers is the easy part—today, all you have to do is start up your accounting software. The hard part is analyzing, interpreting, and communicating the information. Of course, you also have to present everything clearly while effectively interacting with people from every business discipline. 

All this means that “accounting” can be defined as a system for measuring and summarizing business activities, interpreting financial information, and communicating the results to management and other decision makers.

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Role of accounting: Accounting helps direct and control operating activities.

Fields of Accounting

Accountants typically work in one of two major fields. Management accountants provide information and analysis to decision makers inside the organization in order to help them run it. Financial accountants furnish information to individuals and groups both inside and outside the organization in order to help them assess its financial performance.

In other words, management accounting helps you keep your business running while financial accounting tells you how well you’re running it.

Management Accounting

Management accounting plays a key role in helping managers carry out their responsibilities. Reports are tailored to the needs of individual managers, and the purpose of such reports is to supply relevant, accurate, timely information in a format that will aid managers in making decisions. In preparing, analyzing, and communicating such information, accountants work with individuals from all the functional areas of the organization—human resources, operations, marketing, and finance.

Financial Accounting

Financial accounting furnishes information to individuals and groups both inside and outside the organization to help them assess the firm’s financial performance. These financial reports—including the income statement, the balance sheet, and the statement of cash flows—summarize a company’s past performance and evaluate its financial health.

Ethical Considerations

Business ethics is a form of applied ethics that examines ethical principles, moral/ethical problems that arise in a business environment.

Learning Objectives

Indicate the role ethics plays in business

Key Takeaways

Key Points

  • Business ethics reflects the philosophy of business, one of whose aims is to determine the fundamental purposes of a company.
  • Ethical issues include the rights and duties between a company and its employees, suppliers, customers and neighbors, its fiduciary responsibility to its shareholders. Issues concerning relations between different companies include hostile take-overs and industrial espionage.
  • There are different area of business ethics, including finance, human resource management, production…
  • The Securities Act of 1933 and 1934, were both put in place after the stock market crash in 1929. The acts are designed to prevent that type of situation from happening again.
  • In response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom the Sarbanes-Oaxley Act was put into place.

Key Terms

  • Sarbanes-Oxley Act (SOX): An act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards.
  • fiduciary responsibility: A fiduciary is a legal or ethical relationship of trust between two or more parties.

Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.

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Standard Ethics Logo: Standard ethics

Business ethics reflects the philosophy of business, one of whose aims is to determine the fundamental purposes of a company. If a company’s purpose is to maximize shareholder returns, then sacrificing profits to other concerns is a violation of its fiduciary responsibility. Corporate entities are legally considered to be persons in the U.S. and in most nations. The “corporate persons” are legally entitled to the rights and liabilities due to citizens as persons.

Ethical issues include the rights and duties between a company and its employees, suppliers, customers and neighbors, and the company’s fiduciary responsibility to its shareholders. Issues concerning relations between different companies include hostile take-overs and industrial espionage. Related issues include corporate governance, corporate social entrepreneurship, political contributions, legal issues (such as the ethical debate over introducing a crime of corporate manslaughter) and the marketing of corporations’ ethics policies.

Business Ethics In Production

Business ethics in production usually deals with the duties of a company to ensure that products and production processes do not needlessly cause harm. In some cases consumers demand products that harm them, such as tobacco products. Production may have environmental impacts, including pollution, habitat destruction and urban sprawl. The downstream effects of nuclear technology, genetically modified food and mobile phones may not be well understood. While the precautionary principle may prohibit introducing new technology whose consequences are not fully understood, that principle would have prohibited most new technology introduced since the industrial revolution.

Labor Ethics

Human resource management occupies the sphere of activity of recruitment selection, orientation, performance appraisal, training and development, industrial relations and health and safety issues. Business ethicists differ in their orientation towards labor ethics. Some assess human resource policies according to whether they support an egalitarian workplace and the dignity of labor. Human resource management aims to deter discrimination by age (preferring the young or the old), gender/sexual harassment, race, religion, disability, weight and attractiveness.

Government Regulation

At times, the Federal government has been called upon to enact legislation meant to encourage more ethical business behavior. For example, in response to a number of major corporate and accounting scandals — including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom — the Sarbanes-Oxley Act (SOX) of 2002 was put into place. SOX — also known as the “Public Company Accounting Reform and Investor Protection Act” in the Senate and “Corporate and Auditing Accountability and Responsibility Act” in the House — is a United States Federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms.

The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the law. As a result of SOX, top management must now individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements and increased the oversight role of boards of directors.

While it may seem scandals involving a lack of business ethics are a recent development, the Securities Acts of 1933 and 1934 were both put in place after the stock market crash in 1929. These are sweeping pieces of legislation that govern the secondary trading of securities (stocks, bonds, and debentures). The Acts and related statutes form the basis of regulation of the financial markets and their participants in the United States. The 1934 Act also established the SEC.