DK5739_CH3 - 3 Financial Statements Some basic knowledge of...

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3 Financial Statements Some basic knowledge of accounting and financial statements is necessary for a chemical professional to be able to analyze a firm’s operations, discover whether the firm is making a profit and whether a company will continue to make a profit. It is also essential to know how a firm’s operation is reported to determine its role in a particular industry or in the national economy. Financial reports of a company are important sources of data used by management, owners, creditors, investment bankers, and financial analysts. Also, local and state governments and the federal government are interested in the information for tax purposes. There are differences of opinion concerning how much information about the bookkeeping process an engineer should know to understand accounting reports and financial statements which would greatly enhance his or her knowledge of the company. He or she interfaces with the accounting department in the budgeting and control function, in the operation of a department, and in some instances, with input and feedback during stages of design and construction of facilities. Further, a general knowledge of accounting allows the engineer to communicate with accountants, financial personnel, and managers. Also, accounting records provide a source of historical information from actual projects that may be of value to the chemical professional in developing estimates. The conventions governing accounting are fairly simple but their detailed application may be complex, requiring years of study and experience. In this chapter, it is the intent to acquaint the reader with the basic concepts of accounting and financial reporting by using simple examples and by analyzing a typical balance sheet and income statement from a company’s annual report. Accounting systems have as input business transactions in the form of receipts and invoices. These events are entered chronologically in a journal and
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are then classified and posted in an appropriate account in a ledger . Periodically, perhaps once a month but at least once a year, the accounts are closed and a summary is issued as an income statement and a balance sheet . An informational flow diagram is shown in Figure 3.1 [1–3]. 3.1 ACCOUNTING CONCEPTS AND CONVENTIONS There are a number of accounting texts which may be consulted for concepts of accounting and definitions [2,3]. F IGURE 3.1 Flow of information through an accounting system.
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3.1.1 The Accounting Equation Accounting methods in use today had their origin in the 14th century in Italy. Fibonacci introduced the dual-aspect concept and the Medicis made the system more efficient. Their work led to the double-entry bookkeeping system, expressed as follows in simplest terms: Assets ¼ Equities Assets are the economic resources a company owns and which are expected to benefit future operations. Assets are items of value and may be tangible, such as equipment, buildings, furniture, or intangible, like franchises, patents, trademarks.
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