Introduction

• Author: Vern Krishna
• Pages: 1-14

Chapter I: Introduction 1

Chapter I: Introduction

Accounting is the language of business and government. Lawyers,

directors, businesspeople, creditors, and investors should under-

stand the language so that they can evaluate the results of operations

and the status of the corporation. Financial meltdowns at Lehman

Brothers, Enron, WorldCom Inc, Nortel, and Mado teach us that

law and accounting are intertwined and permeate all commercial

transactions and investment decisions. Bad accounting is the step-

ping stone to nancial disaster.

A. BUSINESS CYCLES

e business cycle of a manufacturing or production business gen-

erally comprises seven stages:

) Injection of cash;

) Purchase of raw materials for cash or credit;

) Production of raw materials into work in progress (WIP);

) Completion of nished goods or products for sale;

) Sales for cash or on account;

) Collection of accounts receivable from customers; and

) Return of cash and payment of accounts payable to creditors.

At any point, there are multiple and overlapping cycles. e length

of the cycle depends upon the nature of the business. e cycle may

be extremely short — for example, a fast-food business catering to