Accounting: Tools for Business Decision Making, 5th Edition

Book Preface

Many students who take this course do not plan to be accountants. If you are in that group, you might be thinking, “If I’m not going to be an accountant, why do I need to know accounting?” Well, consider this quote from Harold Geneen, the former chairman of IT&T: “To be good at your business, you have to know the numbers—cold.” In business, accounting and financial statements are the means for communicating the numbers. If you don’t know how to read financial statements, you can’t really know your business.

Many businesses agree with this view. They see the value of their employees being able to read financial statements and understand how their actions affect the company’s financial results. For example, consider Clif Bar & Company. The original Clif Bar® energy bar was created in 1990 after six months of experimentation by Gary Erickson and his mother in her kitchen. Today, the company has almost 300 employees and is considered one of the leading Landor’s Breakaway Brands®.

Clif Bar is guided by what it calls its Five Aspirations—Sustaining Our Business, Our Brands, Our People, Our Community, and the Planet. Its website documents its efforts and accomplishments in these five areas. Just a few examples include the company’s use of organic products to protect soil, water, and biodiversity; the “smart” solar array (the largest in North America), which provides nearly all the electrical needs for its 115,000-square-foot building; and the incentives Clif Bar provides to employees to reduce their personal environmental impact, such as $6,500 toward the purchase of an efficient car or $1,000 per year for eco-friendly improvements toward their homes.

One of the company’s proudest moments was the creation of an employee stock ownership plan (ESOP) in 2010. This plan gives its employees 20% ownership of the company (Gary and his wife Kit own the other 80%). The ESOP also resulted in Clif Bar enacting an open-book management program, including the commitment to educate all employee-owners about its finances. Armed with this basic financial knowledge, employees are more aware of the financial impact of their actions, which leads to better decisions.

Even in companies that do not practice openbook management, today’s employers generally assume that managers in all areas of the company are “financially literate.” To help prepare you for that, in this textbook you will learn how to read and prepare financial statements, and how to use basic tools to evaluate financial results. In this first chapter, we will introduce you to the financial statements of a real company whose products you are probably familiar with—Tootsie Roll. Tootsie Roll’s presentation of its financial results is complete, yet also relatively easy to understand.

Brief Contents
1 Introduction to Financial Statements 2
2 A Further Look at Financial Statements 46
3 The Accounting Information System 100
4 Accrual Accounting Concepts 162
5 Merchandising Operations and the
Multiple-Step Income Statement 228
6 Reporting and Analyzing Inventory 282
7 Fraud, Internal Control, and Cash 334
8 Reporting and Analyzing Receivables 396
9 Reporting and Analyzing Long-Lived Assets 446
10 Reporting and Analyzing Liabilities 504
11 Reporting and Analyzing Stockholders’ Equity 568
12 Statement of Cash Flows 624
13 Financial Analysis: The Big Picture 688
14 Managerial Accounting 752
15 Job Order Costing 798
16 Process Costing 844
17 Activity-Based Costing 894
18 Cost-Volume-Profit 944
19 Cost-Volume-Profit Analysis: Additional Issues 984
20 Incremental Analysis 1040
21 Budgetary Planning 1080
22 Budgetary Control and Responsibility Accounting 1132
23 Standard Costs and Balanced Scorecard 1192
24 Planning for Capital Investments 1244