Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 1 The Role of Accounting in Business 17

of a point in time is measured by its total assets and claims or rights to those assets.

Thus, the financial condition of a business can be represented as follows:

AssetsClaims (Rights to the Assets)

The claims on a business’s assets consist of rights of creditors who have loaned

money or extended credit to the business and the rights of stockholders who have in-

vested in the business. As we discussed earlier, the rights of creditors are liabilities.

The rights of stockholders are referred to as stockholders’ equity, which is sometimes

referred to as owners’ equity. Thus, the assets and the claims on those assets can be

presented in equation form as follows:

AssetsLiabilitiesStockholders’ Equity

This equation is called the accounting equation. As we shall discover in later

chapters, accounting information systems are developed using this equation as their

foundation.

The balance sheet, sometimes called the statement of financial condition, is pre-

pared using the framework of the accounting equation. That is, assets are listed first

and added to arrive at total assets. Liabilities are then listed and added to arrive at to-

tal liabilities. Stockholders’ equity items are listed next and added to arrive at total

stockholders’ equity. Finally, the total assets must equal the combined total liabilities

and stockholders’ equity. In other words, the accounting equation must balance; hence,

the name balance sheet. The balance sheet for Hershey Foods Corporationas of

December 31, 2004, is shown in Exhibit 6.

Q.IBM’sbalance sheet as
of December 31, 2004,
reported assets of
$109,183 million and lia-
bilities of $79,436 million.
What is IBM’s stockhold-
ers’ equity as of December
31, 2004?

A.$29,747 million
($109,183 million 
$79,436 million)

Exhibit 6

Balance Sheet: Hershey

Foods Corporation

Hershey Foods Corporation

Balance Sheet

December 31, 2004 (in millions)

Assets

Cash $55

Accounts receivable 409

Inventories 557

Prepaid expenses 161

Property, plant, and equipment 1,683

Intangibles 589

Other assets 343

Total assets $ 3,797

Liabilities

Accounts payable $ 149

Accrued liabilities 472

Notes and other debt 1,716

Income taxes 371

Total liabilities $ 2,708

Stockholders’ Equity

Capital stock $ 388

Retained earnings 3,469

Repurchased stock and other equity items (2,768)

Total stockholders’ equity $ 1,089

Total liabilities and stockholders’ equity $ 3,797