Accounting Chapter 1:
Financial Statements and
Business Decisions
The reference company we will use in this chapter is “Le Nature’s Inc.”,
which, producing a broad range of non-carbonated healthy beverages
using eco-friendly bottles, had apparently doubled its size in just three
years.
However, as we will go on reading, we will see how the Le Nature’s Inc.
growth was mostly fictitious, a fraud had in fact been committed.
Le Nature’s Inc., was found by two brothers, the Podlucky, as the sole
owners (stockholders) of the company.
Like most entrepreneurs, their growth ambitions soon exceeded their
financial possibilities, and in that moment they turned to banks,
especially Wells Fargo Bank. Banks have a specific role in the
relationship with entrepreneurs, in fact, they lend money to the
company, without buying any power of decision, but expecting in the
future, to receive the money back, charging an interest rate.
Other entities, besides Wells Fargo Bank were also involved in the
growth of the company, such as individuals who acted as investors,
giving a certain amount of money to owners, expecting to receive
dividends and to be able to resell their share at a higher price, in the
future.
So, as a recap, let’s see the definitions of the technical figures involved
with Le Nature’s Inc. we have seen so far:
• Creditor: a creditor is an entity (person or institution) that extends
credit by giving another entity permission to borrow money intended
to be repaid in the future, including an interest rate. Creditors can be
of two types, personal or real, personal creditors are friends or family
who loan money, while real creditors such as banks or finance
companies, have legal contracts with the borrower, sometimes
guarantying the lender (creditor) the possibility to claim any of the
debtor’s real asset if they fail to pay back the loan.
• Stockholder, Investors: a person, a company or an institution that
owns at least one share of the company’s stock, which is known as
equity. Stockholders are essentially owners who gain in the
company’s financial success through dividends.
• Interest: the monetary charge for the privilege of money borrowed
from a lender, typically an annual percentage rate (APR).
• Dividends: distribution of some of a company’s earnings to a class of
its shareholders, as determined by the company’s board of directors.
, Managers, also called internal decision markers, need information of a
company’s financial situation in order to make the best decisions for it,
as well as Stockholders and Creditors, also known as external decision
makers, that need informations in order to decide wether or not to
invest or divest form the business based on the forecast of the
company’s possibility to pay back its debts.
For this reason all companies need an accounting system that collects
and processes financial informations about the organization’s business
activities in order to be recorded and shown to decision makers.
Business activities can be of different sorts:
A. Financing Activities: every monetary exchange happening between
the company and its lenders or stockholders, so both borrowing or
paying back money to creditors and receiving funds or paying
dividends to stockholders.
C STOCKHOLDERS
O
M
P
A
N
Y CREDITORS
B. Investing Activities: buying or selling items such as plant and
equipment (long term assets) that will be used in order to produce
goods/services.
C. Operating Activities: the day to day process of purchasing raw
materials from suppliers, turning them to finished goods and
delivering them to costumers, collecting cash from them and paying
suppliers.
,The accounting system that collects and reports information to decision
makers, is divided into two branches:
• Financial Accounting, deals with the collection of datas to be reported
in the four basic financial statements.
• And, Managerial or Management Accounting, which continuously
collects and reports information to be given to managers, who use
them in order to plan the day-today operations of the firm. On this
branch of accounting we will not focus in this course.
Many managers within the firm do base their moves on financial
informations regarding different topics, such as:
1. Measure Impact: managers have in fact methods that measure the
importance of their previous moves, in terms of profit
2. Determine Budgets: financial statements are also useful to
determine how much a manager can plan to spend for a given
strategy.
3. Cutting unnecessary costs: having a visual representation of all the
cost in which the company has been incurring can be useful to
individuate the costs not needed anymore (ex: monthly subscription
to a service not anymore needed).
4. Think “Big-Picture”: analyzing and consulting financial statements
can make you make decisions having a bigger picture mind set.
5. Align across department: apart from the company’s organization of
labour, it is important to ensure that every department is on the
same page budget and plan wise.
6. Team motivation: having a visual representation of the benefits that
your team has caused to the company thanks to their work, is a big
source of motivation.
The main managerial characters of a firm that take advantages of
financial statements are:
- Marketing Managers and Credit Managers use costumers’ financial
statements in order to decide wether or not to extend credit to
consumers.
- Supply Chain Managers, analyze suppliers’ financial statements in
order to check if they would be able to meet a future company’s
higher demand.
- Both Human Resources managers and employees’ unions use
financial statements in order to decide the level pay rate (wage per
hour) and employee bonuses.
So we can conclude that regardless of the managerial field in which you
work you will need to consult financial statements eventually.
, The four basic financial statements
1. Balance Sheet, reporting the economic resources owned by the
company and the sources financing those resources.
2. Income statement, shows the company’s ability to sell goods at a
higher price than what it costed to buy the raw materials and turn
them into finished goods.
3. Statement of stockholders’ equity, reporting additional monetary
contributions, payments to investors and amount of income
reinvested in the business.
4. Statement of cash flows shows the ability to generate cash and how
that cash is used.
The four basic financial statements can be prepared at any point in
time. However, those for external users are usually prepared either at
the end of each quarter of year (quarterly reports), or at the end of the
year (annual reports).
The Balance Sheet
The purpose of balance sheets is to report the financial position of a
firm, so its assets, liabilities and stockholder’s equities at a particular
point in time.
A great amount of information reported in the balance sheet can be
found in the first lines of it, its heading, which includes for significant
items:
• Name of the entity (Le Nature’s Inc.)
• Title of the statement (Balance Sheet)
• Specific date of the statement (At December 13, 2012). The balance
sheet is in fact seen as a financial snapshot of the company’s position
in that specific point in time
• Unit of measure (in millions of dollars)
Also, the name of the organization for which the datas about the
financial position of the company are being collected, known as
accounting entity, must be included.
On the balance sheet, it is the business entity itself and not its owners
seen as the entity owning the resources and responsible for its debts.
Balance sheets are usually denominated in the currency of the country
in which they are located.
The main three items contained in every balance sheet, Assets,
Liabilities and Stockholders’ equity, together form the so called “Basic
Financial Statements and
Business Decisions
The reference company we will use in this chapter is “Le Nature’s Inc.”,
which, producing a broad range of non-carbonated healthy beverages
using eco-friendly bottles, had apparently doubled its size in just three
years.
However, as we will go on reading, we will see how the Le Nature’s Inc.
growth was mostly fictitious, a fraud had in fact been committed.
Le Nature’s Inc., was found by two brothers, the Podlucky, as the sole
owners (stockholders) of the company.
Like most entrepreneurs, their growth ambitions soon exceeded their
financial possibilities, and in that moment they turned to banks,
especially Wells Fargo Bank. Banks have a specific role in the
relationship with entrepreneurs, in fact, they lend money to the
company, without buying any power of decision, but expecting in the
future, to receive the money back, charging an interest rate.
Other entities, besides Wells Fargo Bank were also involved in the
growth of the company, such as individuals who acted as investors,
giving a certain amount of money to owners, expecting to receive
dividends and to be able to resell their share at a higher price, in the
future.
So, as a recap, let’s see the definitions of the technical figures involved
with Le Nature’s Inc. we have seen so far:
• Creditor: a creditor is an entity (person or institution) that extends
credit by giving another entity permission to borrow money intended
to be repaid in the future, including an interest rate. Creditors can be
of two types, personal or real, personal creditors are friends or family
who loan money, while real creditors such as banks or finance
companies, have legal contracts with the borrower, sometimes
guarantying the lender (creditor) the possibility to claim any of the
debtor’s real asset if they fail to pay back the loan.
• Stockholder, Investors: a person, a company or an institution that
owns at least one share of the company’s stock, which is known as
equity. Stockholders are essentially owners who gain in the
company’s financial success through dividends.
• Interest: the monetary charge for the privilege of money borrowed
from a lender, typically an annual percentage rate (APR).
• Dividends: distribution of some of a company’s earnings to a class of
its shareholders, as determined by the company’s board of directors.
, Managers, also called internal decision markers, need information of a
company’s financial situation in order to make the best decisions for it,
as well as Stockholders and Creditors, also known as external decision
makers, that need informations in order to decide wether or not to
invest or divest form the business based on the forecast of the
company’s possibility to pay back its debts.
For this reason all companies need an accounting system that collects
and processes financial informations about the organization’s business
activities in order to be recorded and shown to decision makers.
Business activities can be of different sorts:
A. Financing Activities: every monetary exchange happening between
the company and its lenders or stockholders, so both borrowing or
paying back money to creditors and receiving funds or paying
dividends to stockholders.
C STOCKHOLDERS
O
M
P
A
N
Y CREDITORS
B. Investing Activities: buying or selling items such as plant and
equipment (long term assets) that will be used in order to produce
goods/services.
C. Operating Activities: the day to day process of purchasing raw
materials from suppliers, turning them to finished goods and
delivering them to costumers, collecting cash from them and paying
suppliers.
,The accounting system that collects and reports information to decision
makers, is divided into two branches:
• Financial Accounting, deals with the collection of datas to be reported
in the four basic financial statements.
• And, Managerial or Management Accounting, which continuously
collects and reports information to be given to managers, who use
them in order to plan the day-today operations of the firm. On this
branch of accounting we will not focus in this course.
Many managers within the firm do base their moves on financial
informations regarding different topics, such as:
1. Measure Impact: managers have in fact methods that measure the
importance of their previous moves, in terms of profit
2. Determine Budgets: financial statements are also useful to
determine how much a manager can plan to spend for a given
strategy.
3. Cutting unnecessary costs: having a visual representation of all the
cost in which the company has been incurring can be useful to
individuate the costs not needed anymore (ex: monthly subscription
to a service not anymore needed).
4. Think “Big-Picture”: analyzing and consulting financial statements
can make you make decisions having a bigger picture mind set.
5. Align across department: apart from the company’s organization of
labour, it is important to ensure that every department is on the
same page budget and plan wise.
6. Team motivation: having a visual representation of the benefits that
your team has caused to the company thanks to their work, is a big
source of motivation.
The main managerial characters of a firm that take advantages of
financial statements are:
- Marketing Managers and Credit Managers use costumers’ financial
statements in order to decide wether or not to extend credit to
consumers.
- Supply Chain Managers, analyze suppliers’ financial statements in
order to check if they would be able to meet a future company’s
higher demand.
- Both Human Resources managers and employees’ unions use
financial statements in order to decide the level pay rate (wage per
hour) and employee bonuses.
So we can conclude that regardless of the managerial field in which you
work you will need to consult financial statements eventually.
, The four basic financial statements
1. Balance Sheet, reporting the economic resources owned by the
company and the sources financing those resources.
2. Income statement, shows the company’s ability to sell goods at a
higher price than what it costed to buy the raw materials and turn
them into finished goods.
3. Statement of stockholders’ equity, reporting additional monetary
contributions, payments to investors and amount of income
reinvested in the business.
4. Statement of cash flows shows the ability to generate cash and how
that cash is used.
The four basic financial statements can be prepared at any point in
time. However, those for external users are usually prepared either at
the end of each quarter of year (quarterly reports), or at the end of the
year (annual reports).
The Balance Sheet
The purpose of balance sheets is to report the financial position of a
firm, so its assets, liabilities and stockholder’s equities at a particular
point in time.
A great amount of information reported in the balance sheet can be
found in the first lines of it, its heading, which includes for significant
items:
• Name of the entity (Le Nature’s Inc.)
• Title of the statement (Balance Sheet)
• Specific date of the statement (At December 13, 2012). The balance
sheet is in fact seen as a financial snapshot of the company’s position
in that specific point in time
• Unit of measure (in millions of dollars)
Also, the name of the organization for which the datas about the
financial position of the company are being collected, known as
accounting entity, must be included.
On the balance sheet, it is the business entity itself and not its owners
seen as the entity owning the resources and responsible for its debts.
Balance sheets are usually denominated in the currency of the country
in which they are located.
The main three items contained in every balance sheet, Assets,
Liabilities and Stockholders’ equity, together form the so called “Basic
