Financial Statements: A Business Means of Communication
Chapter I – Problem and its Background
The American Accounting Association in its Statement of Basic Accounting Theory defines Accounting as a process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.
Although accounting is vital to one’s daily activities, it has made its impact in the field of business, from the small bakery in the street corner to a multi-national corporation in Ayala or Makati Avenue. The baker in the street corner has a problem of what bread to bake, how much materials to buy and what prices will the bread and pastries be sold. If San Miguel Corporation, in answer to globalization, plans to expand operation and put up branches abroad, it must make decisions regarding where to establish its branches, how much capital to invest, and what products to produce and at what prices will these be sold. Again, decisions regarding these matters require an understanding of accounting information.
All businesses, from a simple one to the most complicated one, have one thing in common: they need financial information before making decisions. Therefore knowledge of the accounting language and how to use it is very important. Accounting plays a vital role in business by keeping track of its activities and resources and by reporting back its financial position and results of operations. In other words, an accountant’s task is to supply financial information to statement users so that they could make informed judgment and better decision.
The accounting information were gathered and summarized into financial statements. Financial statements are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users. Stated differently, the financial statements are the end product or main output of the financial accounting process....