Page 46 - Accounting Principles (A Business Perspective)

1. Accounting and its use in business decisions

As you can see from the preceding data, the equity ratios of actual companies vary widely. Companies such as
Johnson & Johnson and 3M Corporation employ a higher proportion of stockholders’ equity (a lower proportion of
debt) than GE in an effort to have stronger balance sheets (more solvency). GE employs a greater proportion of

debt, possibly in an attempt to increase profitability. Every company must strike a balance between solvency and
profitability to ensure long-run survival. The correct balance between proportions of stockholder and creditor
equities depends on the industry, general business conditions, and management philosophy.
Chapter 1 has introduced two important components of the accounting process—the accounting equation and
the business transaction. In Chapter 2, you learn about debits and credits and how accountants use them in
recording transactions. Understanding how data are accumulated, classified, and reported in financial statements
helps you understand how to use financial statement data in making decisions.

An accounting perspective:

Uses of technology

When you apply for your first job after graduation, prospective employers will expect you to know
how to use a PC to perform many tasks. Therefore, before you graduate you should be able to use
word processing, spreadsheet, and database software. You should be able to use the Internet to find
useful information. In many universities, you can learn these skills in courses taken for credit. If
your school does not offer credit courses, take noncredit courses or attend a training center.

Understanding the learning objectives
• A single proprietorship is an unincorporated business owned by an individual and often managed by
that individual.
• A partnership is an unincorporated business owned by two or more persons associated as partners and
is often managed by them.
• A corporation is a business incorporated under the laws of a state and owned by a few stockholders or

by thousands of stockholders.
• Service companies perform services for a fee.
• Merchandising companies purchase goods that are ready for sale and then sell them to customers.
• Manufacturing companies buy materials, convert them into products, and then sell the products to
other companies or to final customers.

• The income statement reports the revenues and expenses of a company and shows the profitability of
that business organization for a stated period of time.
• The statement of retained earnings shows the change in retained earnings between the beginning of
the period (e.g. a month) and its end.
• The balance sheet lists the assets, liabilities, and stockholders’ equity (including dollar amounts) of a

business organization at a specific moment in time.
• The statement of cash flows shows the cash inflows and cash outflows for a company for a stated
period of time.

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