Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 1 The Role of Accounting in Business 15

• Retained earnings statement—A summary of the changes in the earnings
  retained in the corporation for a specific period of time, such as a month or a year.


• Balance sheet—A list of the assets, liabilities, and stockholders’ equity as of a spe-
  cific date, usually at the close of the last day of a month or a year.


• Statement of cash flows—A summary of the cash receipts and cash payments for
  a specific period of time, such as a month or a year.

In the next section, we describe and illustrate the preceding four financial state-

ments for Hershey Foods Corporation. Our objective in this section is to introduce you

to the financial statements that we will be studying throughout this text. In later chap-

ters, we will expand upon these concepts and terminology. The four financial state-

ments are illustrated in Exhibits 4–7. The data for the statements were adapted from

the annual report of Hershey Foods Corporation.^4

Income Statement

The income statement reports the change in financial condition due to the operations

of a business. The time period covered by the income statement may vary depending

upon the needs of the stakeholders. Public corporations are required to file quarterly

and annual income statements with the Securities and Exchange Commission. The in-

come statement shown in Exhibit 4 for Hershey Foods Corporationis for the year

ended December 31, 2004.

Since the focus of business operations is to generate revenues, the income state-

ment begins by listing the revenues for the period. During 2004, Hershey Foods

Corporation generated sales of over $4.4 billion. These sales are listed under the rev-

enue caption. You should note that the numbers shown in Exhibit 4 are expressed in

millions of dollars. It is common for large corporations to express their financial state-

ments in thousands or millions of dollars.

Following the revenues, the expenses that were used in generating the revenues

are listed. For Hershey Foods, these expenses include cost of sales, selling and admin-

istrative, interest, and income taxes. By reporting the expenses and the related rev-

enues for a period, the expenses are said to be matched against the revenues. This is

known in accounting as the matching concept. We will further discuss this concept later

in this chapter.

When revenues exceed expenses for a period, the business has net income. If ex-

penses exceed revenues, the business has a net loss. Reporting net income means that

the business increased its net assets through its operations. That is, the assets created

4 The financial statements for Hershey Foods Corporation can be found at http://www.hersheys.comby

clicking on “Investor Relations.”

Exhibit 4

Income Statement:
Hershey Foods
Corporation

Hershey Foods Corporation

Income Statement

For the Year Ended December 31, 2004 (in millions)

Revenues:

Sales $4,429

Expenses:

Cost of sales $2,679

Selling and administrative 847

Interest 67

Income taxes 245 3,838

Net income $ 591