Question: Investors are interested (sometimes almost obsessively interested) in the financial information that is produced by a company based on the rules and principles of financial accounting. They want to use this information to make wise investing decisions. What do investors actually hope to learn about a company from this financial information?
Economists often refer to income as a measure of better-offenses. In other words, economic income represents an increase in the command over goods and services. Such notions of income capture a business’s operating successes, as well as a good fortune from holding assets that may increase in value.
You likely have a general concept of what accountants do. They capture information about the transactions and events of a business and summarize that activity in reports that are used by persons interested in the entity. But, you likely do not realize the complexity of accomplishing this task. It involves a talented blending of technical knowledge and measurement artistry that can only be fully appreciated via the extensive study of the subject.
In the previous chapter, you learned all about adjustments that might be needed at the end of each accounting period. These adjustments were necessary to bring a company’s books and records currently in anticipation of calculating and reporting its income and financial position.
However, Information Processing did not illustrate how those adjustments would be used to actually prepare the financial statements. This chapter will begin with that task.
The previous chapter showed how transactions caused financial statement amounts to change. “Before” and “after” examples, etc. was used to develop the illustrations. Imagine if a real business tried to keep up with its affairs this way! Perhaps a giant chalk board could be set up in the accounting department.
As transactions occurred, they would be called in to the department and the chalk board would be updated. Chaos would quickly rule. Even if the business could manage to figure out what its financial statements were supposed to contain, it probably could not systematically describe the transactions that produced those results. Obviously, a system is needed.