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manufacturing company-statement-

manufacturing company-statement-

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Management Accounting
|31
Financial Statements for Manufacturing Businesses
Importance of Financial Statements
Accounting plays a critical role in decision-making. Accounting provides the
nancial framework for analyzing the results of an executed set of decisions andmakes possible the continuous success of a business or improvement in operations.Secondly, accounting provides much of the necessary information needed in makinggood decisions. Thirdly, the management accountant provides a knowledge of basicdecision-making tools that helps nd the best alternative in decision-making.It is the accountant’s knowledge about preparing nancial statements and his or her abilities to analyze and interpret nancial statements that makes the controllershipfunction in a business so valuable to management. However, it is also important for management to have a fundamental knowledge of nancial statements, particularlyregarding the analysis and evaluation of nancial statements to make decisions.A primary objective of a business is to increase the assets from operations. Byoperations is meant all the revenue and expense transactions of a business for adened period of time. Since the excess of revenue over expenses (net income)increases the equity of a business, it is often said that the primary objective is toincrease stockholders’ wealth, assuming the business is a corporation. The successof a business in nancial terms, then, depends on how well management managesrevenues and expenses. In other terms, the decisions that management makesconcerning the operations of the business are of paramount importance. Managementhas the responsibility to make the kinds of decisions that generates net income.Revenues are the inow of assets caused by the operations of the business. The
term
revenue necessarily implies increases in assets. If a transaction does not causean increase in an asset, then that transaction is not a revenue transaction. Followingis a list of several types of items that fall under the category of revenue:
Revenue Asset
Inow
Sales Cash or Accounts receivableInterest Income Cash or interest receivableRental income Cash or rent receivable
 
 32|
CHAPTER THREE
Financial Statements for Manufacturing Business
Expenses are the outow of assets from the operations of the business. Expensesare caused by activities necessary to generate revenue. When revenues exceedsexpenses as is the goal, the difference is called net income. If a transaction does notcause a decrease in an asset, then that transactions is not an expense. Followingis a list of several expenses and the asset decrease associated with that particular expense.
 
Expense
Asset outow
 
Cost of goods sold Prepaid insuranceSalaries Expired life of the service valueSupplies expense SuppliesDepreciation, building Expired cost of a building
Technically, the asset outow associated with salaries is not cash. Payments aremade to workers and other employees because they create something of value. Inmore technical terms an expense is the expired value of an asset. A janitor is paidto clean oors. The thing of value acquired is a clean oor and as long as the oor remains clean, it is something of value. However, when the clean oor becomes dirtyagain, then the value of the clean oor asset has expired. Because many assets havea very short life, the accountant often simply records the expense even though thevalue of the assets at the time of recording has not yet expired.Often the acquisition of an asset is not paid for immediately and the amount thenowed is called a liability. Liabilities are debts or obligations to pay at some future dateand are a common form of nancing in a business. There are three primary sourcesof assets in a business: (1) revenues (2) liabilities (3) capital. The ve key wordsfrom an accounting viewpoint and also from a management viewpoint are assets,liabilities, capital, revenue, and expenses.In one sense, the purpose of management is to make asset, liabilities, capital,revenue, and expense decisions. Since the income statement shows revenues,expenses and net income and the balance sheet shows assets, liabilities, and capital,we can say that the purpose of management is to manage assets, liabilities, capital,revenue, and expenses. Stated simply, the purpose of management is to managenancial statements.Because of the importance of sound operations and nancial condition, it is criti
-
cally important for both management and accountants to have a sold understandingof nancial statements. While accountants prepare nancial statements, it is manage
-
ment that creates nancial statements through the decisions it makes. Because of the importance of nancial statements, the rest of this chapter is concerned withpresenting the fundamentals of nancial statements for a manufacturing business.The four nancial statements of critical value in this text are as follows:1. Balance sheet2.
Income statement
3. Cost of goods manufactured statement
4.
Statement of cash ow
 
Management Accounting
|33
Financial statements are based on well dened accounting concepts andstandards, some of which are fairly technical and require some concentrated study tolearn and use. The following is a list of accounting terminology and concepts importantin understanding nancial statements for a manufacturing business.
Accounting Terminology
Amortization
Accounts receivableAccounts payable
BondsBad debts
CreditCapitalCashCommon stockContribution marginCostCurrent assets
Cost of goods soldCost of goods manufactured
DepreciationDirect costDividendsFinished goods
Fixed assets
Factory labor 
Fixed cost
Gain/loss on sale
Gross prot
Indirect costInventory
Income taxes
Investment
Manufacturing overheadMaterial used
Net incomeNet operating income
Net income after taxesPerpetual inventoryPeriodic inventory
Retained earnings
Premium/discount on stockPremium/discount on bonds
Stockholders’ equity
Tax expense
Treasury stockTrade-in valueVariable cost
Hopefully, you have learned these terms in a previous accounting course andonly some review of these terms is needed.
In addition to terminology, there are some accounting concepts and conventions
of a broader nature that involve theory and even, in some cases, considerabledifferences of opinion. Some of the important concepts involved in this book areshown as follows.
Accounting Concepts
 
Absorption costing Earned/unearned revenueAccrual basis accounting Inventory costing methods
Accounting control MatchingCash basis accounting PlanningCost Standards/principles of accounting
Control Full costing reporting
Deferred charges Contribution basis reporting
Direct costing
Accounting Financial Statement Relationships
In addition to important nancial statement terminology, there are a number of manufacturing nancial statement relationships critical to understanding and usingnancial statements. These relationships may be summarized as simple mathematicalequations. The most important of these relationships are the following:

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