Financial Accounting: An Integrated Statements Approach, 2nd Edition

3. The balance sheet and statement of cash flows are integrated. Thecash on the bal-
   ance sheet also appears as the end-of-the-periodcash on the statement of cash flows.
   To illustrate, the cash of $55 million reported on Hershey’s balance sheet is also
   reported as the end-of-the-period cash on the statement of cash flows.

The preceding integration is important in analyzing financial statements and the

possible impact of economic events or transactions on a business. In addition, this inte-

gration serves as a check onwhether the financial statements have been prepared cor-

rectly. For example, if the ending cash on the statement of cash flows doesn’t agree with

the balance sheet cash, then an error exists.

ACCOUNTING CONCEPTS

In the preceding section, we described and illustrated the four basic corporate financial

statements. Just as the rules of football determine the proper manner of scoring touch-

downs, accounting “rules,” called generally accepted accounting principles (GAAP),

determine the proper content of financial statements. GAAP are necessary so that stake-

holders can compare the financial condition and operating results across companies and

across time. If the management of a company could prepare financial statements as they

saw fit, the comparability between companies and across time periods would be diffi-

cult, if not impossible. In other words, this would be like allowing a football team to

determine the point-count for a touchdown every time it scored.

20 Chapter 1 The Role of Accounting in Business

Exhibit 8

Integrated Financial Statements

Hershey Foods Corporation

Balance Sheet

December 31, 2004

Assets  Liabilities  Stockholders’Equity

Cash $ 55 ••

••

• 
  
  
  
  • 
    
  
  
  • $3,469 Retained Earnings
    $3,797  $2,708  $1,089
  
  
  
  

Hershey Foods Corporation

Statement of Cash Flows

For the Year Ended Dec. 31, 2004

Operating act. $ 797

Financing act.

Investing act. (363)

(494)

Decrease in cash $ (60)

Cash, Jan. 1 115

Cash, Dec. 31 $ 55

Hershey Foods Corporation

Retained Earnings Statement

For the Year Ended Dec. 31, 2004

Retained earnings, Jan. 1 $3,264

Add: Net income $591

Less: Dividends 386 205

Retained earnings, Dec. 31 $3,469

Hershey Foods Corporation

Income Statement

For the Year Ended Dec. 31, 2004

Revenues $4,429

Expenses 3,838

Net income $ 591

3 1 2

$3,797

Total Liabilities + Stockholders’ Equity

Describe eight accounting

concepts underlying

financial reporting.

5