Financial Accounting: An Integrated Statements Approach, 2nd Edition

the second objective as a moving picture (video) of the business. The first objective mea-

sures the financial status of a business. This measure is used by stakeholders to evaluate

the business’s financial health at a point in time. The second objective measures the

change in the financial condition of a business for a period of time. This measure is used

by stakeholders to predict how a business may perform in the future.

The objectives of accounting are satisfied by (1) recording the economic events af-

fecting a business and then (2) summarizing the impact of these events on the business

in financial reports, called financial statements. We will describe and illustrate the

basic financial statements next.

FINANCIAL STATEMENTS

Financial statements report the financial condition of a business at a point in time and

changes in the financial condition over a period of time. The four basic financial state-

ments and their relationship to the two objectives of financial accounting are listed below.^3

Financial Statement Financial Accounting Objective

Income statement Reports change in financial condition

Retained earnings statement Reports change in financial condition

Balance sheet Reports financial condition

Statement of cash flows Reports change in financial condition

The income statement is normally prepared first, followed by the retained earn-

ings statement, the balance sheet, and the statement of cash flows. The nature of each

statement is described below.

• Income statement—A summary of the revenue and the expenses for a specific
  period of time, such as a month or a year.

14 Chapter 1 The Role of Accounting in Business

Exhibit 3

Objectives of Financial

Accounting

Change in

Financial Condition

for Year Ending

December 31, 2007

Financial Condition

at December 31, 2007

Financial Condition

at January 1, 2007

3 Instead of the retained earnings statement, companies often prepare a statement of stockholders’ equity.

This statement reports changes in retained earnings as well as changes in other stockholders’ equity items.

We describe and illustrate the statement of stockholders’ equity in a later chapter, after we have discussed

stockholders’ equity in more detail.

Describe and illustrate the

basic financial statements

and how they interrelate.

4