Well, Accounting in Action consider this quote from Harold Geneen, the former chairman of IT&T: “To be good at your business, you have to know the numbers—cold.”
In business, accounting and financial statements are the means for communicating the numbers.
If you don’t know how to read financial statements you can’t really know your business.Many businesses agree with this view. They see the value of their employees being able to read financial statements and understand how their actions affect the company’s financial results. For example, consider Clif Bar & Company. The original Clif Bar® energy bar was created in 1990 by Gary Erickson and his mother in her kitchen.
Today, the company has almost 300 employees.Clif Bar is guided by what it calls its Five Aspirations—Sustaining Our Business, Our Brands, Our People, Our Community, and the planet. Its website documents its efforts and accomplishments in these five areas. Just a few examples include the company’s use of organic products to protect soil, water, and biodiversity; the ‘‘smart” solar array (the largest in North America), which provides nearly all the electrical needs for its 115,000 square foot building; and the incentives Clif Bar provides to employees to reduce their personal environmental impacts, such as $6,500 toward the purchase of an efficient car or $1,000 per year for eco-friendly improvements toward their homes.One of the company’s proudest moments was the creation of an employee stock ownership plan. (ESOP) in 2010. This plan gives Its employees 20% ownership of the company (Gary and his wife Kit own the other 80%). The ESOP also resulted in Clif Bar in acting an open-book management program, including the commitment to educate all employee-owners about its finances. Armed with this basic financial knowledge, employees are more aware of the financial impact of their actions, which leads to better decisions. Many other companies have adopted this open-book management approach.’’Even in companies that do not practice open-book, management, employers generally assume that managers in all areas of the company are “financially literate”Taking this course will go a long way to making you financially literate. In this textbook, you will learn how to read and prepare financial statements, and how to use basic tools to evaluate financial results. Throughout this textbook, we attempt to increase your familiarity with financial reporting by providing numerous references, questions, and exercises that encourage you to explore the financial statements of well-known companies.
What consistently ranks as one of the top career opportunities in business? What frequently rates among the most popular majors on campus? What was the undergraduate degree is chosen by Nike founder Phil Knight, Home Depot co-founder Arthur Blank, former acting director of the Federal Bureau of Inves¬tigation (FBI) Thomas Pickard, and numerous members of Congress? Accounting. Why aid these people to choose to account? They wanted to understand what was happening financially to their organizations. Accounting is the financial information system that provides these insights. In short, to understand your organization, you have to know the numbers.Accounting consists of three basic activities—it identifies, records, and communicates the economic events of an organization to interested users. Let’s take a closer look at these three activities.
As a starting point to the accounting process, a company identifies the economic events relevant to its business. Examples of economic events are the sale of
snack chips by PepsiCo, the provision of cell phone services by AT&T, and the payment of wages by Facebook.Once a company like PepsiCo identifies economic events,
it records those events in order to provide a history of its financial activities. The recording consists of keeping a systematic, chronological diary of events,
measured in dollars and cents. In the recording, PepsiCo also classifies and summarizes economic events.Finally, PepsiCo communicates the collected information to interested users by means of accounting reports. The most common of these reports are called financial statements. To make the reported financial information
meaningful, PepsiCo reports the recorded data in a standardized way. It accumulates infor¬mation resulting from similar transactions.
PepsiCo accumulates all sales transactions over a certain period of time and Reports the data as one amount in the company’s financial statements. Such data are
said to be reported in the aggregate. By presenting the recorded data in the aggregate, the account¬ing process simplifies a multitude of transactions and makes
a series of activities understandable and meaningful.A vital element in communicating economic events is the accountant’s ability to analyze and interpret the
reported information. The analysis involves a use of ratios, percentages, graphs, and charts to highlight significant financial trends and relationships.
Interpretation involves explaining the uses, meaning, find limitations of reported data. Appendices A-E show the financial statements of Apple Inc., PepsiCo Inc.,
The Coca-Cola Company, Amazon.com, Inc., and Wal-Mart Stores, Inc., respectively. (In addition, in the A Look at IFRS section at the end of each chapter,
the French company Louis Vuitton Moet Hennessy is analyzed.) We refer to these statements at various places throughout the text¬book. At this point,
these financial statements probably strike you as complex and confusing. By the end of this course, you’ll be surprised at your ability to under¬stand, analyze,
and interpret them.
You should understand that the accounting process includes the bookkeeping function. Bookkeeping usually involves only the recording of economic events.It is therefore just one part of the accounting process. In total, accounting involves the entire process of identifying, recording, and communicating economic events.
Who Uses Accounting Data
The financial information that users need depends upon the kinds of decisions they make. There are two broad groups of users of financial information:
internal users and external users.
Internal users of accounting information are managers who plan, organize, and run the business. These include marketing managers, production supervisors,
finance directors, and company officers. In running a business, internal users must answer many important questions.To answer these and other questions,
internal users need detailed information on a timely basis. Managerial accounting provides internal reports to help users make decisions about their companies.
Examples are financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year.
External users are individuals and organizations outside a company who want financial information about the company. The two most common types of external users are investors and creditors. Investors (owners) use accounting infor¬mation to decide whether to buy, hold, or sell ownership shares of a company.
Creditors (such as suppliers and bankers) use accounting information to evalu¬ate the risks of granting credit or lending money. Financial accounting answers
these questions. It provides economic and financial information for investors, creditors, and other external users. The infor¬mation needs of external users
vary considerably. Taxing authorities, such as the Internal Revenue Service, want to know whether the company complies with tax laws. Regulatory agencies,
such as the Securities and Exchange Commission or the Federal Trade Commission, want to know whether the company is operating within prescribed rules.
Customers are interested in whether a company like Telsa will continue to honor product warranties and support its product lines. Labor unions such as
the Major League Baseball Players Association want to know whether the owners have the ability to pay increased wages and benefits.