What is accounting?Financial Statements

What is accounting?And its role in business?

How do stakeholders get information about the financing, investing, and operating activities of a business? This is the role of accounting. Accounting provides information for managers to use in operating the business. In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business

What is accounting?

In a general sense, accounting can be defined as an information system that provides reports to stakeholders about the economic activities and condition of a business. We will focus our discussions in this text on accounting and its role in business. However, many of the concepts in this text also apply to individuals, governments, and other types of organizations. For example, individuals must account for activities such as hours worked, checks written, and bills due. Stakeholders for individuals include creditors, dependents, and the government. A main interest of the government is making sure that individuals pay the proper taxes

What is accounting?Financial Statements

Accounting is sometimes called the “language of business.” This is because accounting is the means by which business information is communicated to the stakeholders. For example, accounting reports summarizing the profitability of a new product help Coca-Cola’s management decide whether to continue offering the new product for sale. Likewise, financial analysts use accounting reports in deciding whether to recommend the purchase of Coca-Cola’s stock. Banks use accounting reports in deciding the amount of credit to extend to Coca-Cola. Suppliers use accounting reports in deciding whether to offer credit for Coca-Cola’s purchases of supplies and raw materials. State and federal governments use accounting reports as a basis for assessing taxes on Coca-Cola.

As we described above, accounting serves many purposes for business. A primary purpose is to summarize the financial performance of the firm for external users, such as banks and governmental agencies. The branch of accounting that is associated with preparing reports for users external to the business is termed financial accounting. Accounting also can be used to guide management in making decisions about the business. This branch of accounting is called managerial accounting. Financial and managerial accounting overlap in many areas. For example, financial reports for external users are often used by managers in considering the impact of their decisions.

In this text, we focus on financial accounting. The two major objectives of financial accounting are:

1. To report the financial condition of a business at a point in time.

2. To report changes in the financial condition of a business over a period of time.

Financial Statements


Financial statements report the financial condition of a business at a point in time and changes in the financial condition over a period of time. The four basic financial statements and their relationship to the two objectives of financial accounting are listed below.

The income statement is normally prepared first, followed by the retained earnings statement, the balance sheet, and the statement of cash flows. The nature of each statement is described below.

• Income statement—A summary of the revenue and the expenses for a specific period of time, such as a month or a year.

• Retained earnings statement—A summary of the changes in the earnings retained in the corporation for a specific period of time, such as a month or a year.

• Balance sheet—A list of the assets, liabilities, and stockholders’ equity as of a specific date, usually at the close of the last day of a month or a year.

• Statement of cash flows—A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year.

In the next section, we describe and illustrate the preceding four financial statements for Hershey Foods Corporation. Our objective in this section is to introduce you to the financial statements that we will be studying throughout this text. In later chapters, we will expand upon these concepts and terminology. The four financial statements are illustrated in Exhibits 4–7. The data for the statements were adapted from the annual report of Hershey Foods Corporation.

What is accounting?Financial Statements

The incomes coming into the business surpassed the advantages utilized in producing the incomes. The target of most organizations is to expand overall gain or benefit. A net shortfall implies that the business diminished its net resources through its activities. While a business may get by in the short kept running by announcing overall deficits, over the long haul a business must report net gain to endure.

Amid 2004, Hershey Foods earned total compensation of nearly $600 million dollars. Is this great or terrible? Unquestionably, overall gain is superior to a total deficit. In any case, the partners

must survey the financial execution of the partnership as indicated by their very own models. For instance, a lender may be fulfilled that the total compensation is adequate to guarantee that it will be reimbursed. Then again, an investor probably won’t be fulfilled if the enterprise’s gainfulness is not as much as its rivals’ benefit. All through this content, we portray different techniques for surveying corporate execution. Held Earnings Statement

The held profit explanation reports changes in money related condition because of changes in held income amid a period. Held profit is the part of a company’s total compensation that is held in the business. A company may hold the majority of its

overall gain for use in extending activities, or it might pay a part or the majority of its total compensation to investors as profits. For instance, high-development organizations like Google Inc. what’s more, Sirius Satellite Radio don’t appropriate profits to investors, they hold benefits for future extension. Conversely, progressively develop enterprises like Coca-Cola or General Electric routinely pay their investors a normal profit. In this way, financial specialists, for example, retirees who want the solace of a normal profit installment might put resources into Coca-Cola or General Electric. Interestingly, more youthful and progressively forceful development situated speculators may put resources into Google or Sirius.

What is accounting?Financial Statements

Since held profit rely on overall gain, the time frame secured by the held profit explanation is indistinguishable period from the salary articulation. Therefore, the

held income articulation for Hershey Foods Corporation appeared in Exhibit 5 is for the year finished December 31, 2004.

You should take note of that profits are accounted for in Hershey’s held income articulation instead of in the pay explanation. This is on the grounds that profits are not a cost, yet are an appropriation of net gain to investors. Amid 2004, Hershey disseminated (pronounced) profits of $386 million and held $205 million of its overall gain in the business. Along these lines, Hershey’s held income expanded from $3,264 million

What is accounting?Financial Statements

to $3,469 million amid 2004.of a point in time is estimated by its absolute resources and claims or rights to those advantages. In this way, the budgetary state of a business can be spoken to as pursues: Resources Claims (Rights to the Assets) The cases on a business’ benefits comprise of privileges of leasers who have advanced cash or stretched out credit to the business and the privileges of investors who have put resources into the business. As we talked about before, the privileges of loan bosses are liabilities.

The privileges of investors are alluded to as investors’ value, which is once in a while alluded to as proprietors’ value. Hence, the advantages and the cases on those benefits can be exhibited in condition structure as pursues:

Resources Liabilities  Stockholders’ Equity

This condition is known as the bookkeeping condition. As we will find in later parts, bookkeeping data frameworks are produced utilizing this condition as their establishment.

The monetary record, some of the time called the announcement of budgetary condition, is readied utilizing the system of the bookkeeping condition. That is, resources are recorded first

what’s more, added to touch base at absolute resources. Liabilities are then recorded and added to touch base at all out liabilities. Investors’ value things are recorded straightaway and added to touch base at aggregate

investors‘ value. At long last, the complete resources must equivalent the joined all out liabilities

also, investors’ value. As it were, the bookkeeping condition must adjust; consequently,

the name accounting report. The accounting report for Hershey Foods Corporation as of

December 31, 2004,As of December 31, 2004, Hershey had complete resources of $3.8 billion, of which loan bosses

had cases of $2.7 billion and investors had cases of $1.1 billion. One utilization of the accounting report by loan bosses is to decide if the company’s benefits are adequate to

guarantee that they will be paid their cases. For Hershey’s situation, as of December 31, 2004, the

resources of the partnership surpass the lenders’ cases by $1.1 billion. Hence, the loan bosses are sensibly guaranteed that their cases will be reimbursed.

Explanation of Cash Flows

The announcement of money streams reports the change in monetary condition due to the

changes in real money amid a period. Amid 2004, Hershey’s net money diminished by $60 million, as appeared in Exhibit 7. Prior in this section, we examined the three business exercises of financing, contributing, and working. Any adjustments in real money must be identified with one of these three exercises. Hence, the announcement of money streams is sorted out by revealing the progressions in every one of these three exercises, as appeared in Exhibit 7.

What is accounting?Financial Statements

In the announcement of money streams, the net money streams from working exercises is accounted for first, since money streams from working exercises are an essential investigation center

for most business partners. For instance, banks are keen on deciding

regardless of whether the organization’s working exercises are producing enough positive income

to reimburse their obligations. Similarly, investors are keen on the organization’s capacity to

pay profits. A business can’t make due in the long haul except if it creates positive

money streams from working exercises. In this way, representatives, administrators, and different partners inspired by the long haul suitability of the business additionally center upon the money

streams from working exercises. Amid 2004, Hershey’s tasks created a positive

net income of $797 million.

Due to the effect contributing exercises have on the tasks of a business, the

money streams from contributing exercises are displayed following the money streams from working exercises area. Any money receipts from moving property, plant, and hardware

would be accounted for in this area. Similarly, any buys of property, plant, and hardware would be accounted for as money installments. Organizations that are extending quickly, such

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