INTRODUCTION TO FINANCIAL STATEMENTS
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Scan Study Objectives Read Feature Story Scan Preview Read Text and Answer Do it! p. 5 p. 11 p. 18 p. 20 Work Using the Decision Toolkit Review Summary of Study Objectives Work Comprehensive Do it! p. 23 Answer Self-Test Questions Complete Assignments Go to WileyPLUS for practice and tutorials Read A Look at IFRS p. 42
After studying this chapter, you should be able to: 1 Describe the primary forms of business organization. 2 Identify the users and uses of accounting information. 3 Explain the three principal types of business activity. 4 Describe the content and purpose of each of the financial statements. 5 Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation. 6 Describe the components that supplement the financial statements in an annual report.
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The Navigator is a learning system designed to prompt you to use the learning aids in the chapter and to set priorities as you study.
Many students who take this course do not plan to be accountants. If you are in that group, you might be thinking, “If I’m not going to be an accountant, why do I need to know accounting?” In response, 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.” Success in any business comes back to the numbers. You will rely on them to make decisions, and managers will use them to evaluate your performance. That is true whether your job involves marketing, production, management, or information systems. 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 companies spend significant resources teaching their employees basic accounting so that they can read financial statements and understand how their actions affect the company’s financial results. One such company is Springfield ReManufacturing Corporation (SRC). When Jack Stack and 11 other managers purchased SRC for 10 cents a share, it was a failing division of International Harvester. Jack’s 119 employees were counting on him for their livelihood. He decided that for the company to survive, every employee needed to think like a businessperson and to act like an owner. To accomplish this, all employees at SRC took basic accounting courses and participated in weekly reviews of the company’s financial statements. SRC survived, and eventually thrived. To this day, every employee (now numbering more than 1,000) undergoes this same training. Many other companies have adopted this approach, which is called “open-book management.” 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 book you will learn how to read and prepare financial statements, and how to use basic tools to evaluate financial results. In this first chapter we will introduce you to the financial statements of a real company whose products you are probably familiar with—Tootsie Roll. Tootsie Roll’s presentation of its financial results is complete, yet also relatively easy to understand. Tootsie Roll started off humbly in 1896 in a small New York City candy shop owned by an Austrian immigrant, Leo Hirshfield. The candy’s name came from his five-year-old daughter’s nickname—“Tootsie.” Today the Chicago-based company produces more than 49 million Tootsie Rolls and 16 million Tootsie Pops each day. In fact, Tootsie Pops are at the center of one of science’s most challenging questions: How many licks does it take to get to the Tootsie Roll center of a Tootsie Pop? The answer varies: Licking machines created at Purdue University and the...