5. Financial statements classified.—As already mentioned in the other volumes on accounting, the principal financial statement is the balance sheet. ' This statement discloses the financial condition of a business at a particular time. It is well for the reader to bear in mind at this point that a balance sheet is only an -expression of opinion regarding the financial condition of a business at a given time. The importance of this 'statement will be made evident later on.
The next statement in importance is the profit and loss, or income statement, sometimes called the profit and loss, or income account. This statement presents a history of what has occurred since the date of the last balance sheet.
Each of these statements may have supporting schedules showing in greater detail information con cerning some factor or factors of the business. In a large undertaking, both the balance sheet and the profit and loss statement will usually be prepared in detail as well as in condensed form.
The condensed income statement usually reveals only the general tendencies of the business. One has therefore to refer to supplementary or explanatory statements that, as a rule, accompany the main state ments, for the details of the various transactions.
6. Statistical inf ormation.—To supplement the bal ance sheet and income statements many forms of statistical statements are often prepared. These statements serve the purpose Of explaining many of the items that appear in the main statements. It is self-evident that too much detail carmot be conven iently presented in a single statement, if it is to be of any value. It is a well-known fact that both the eyes and the mind of a person reading a statement can grasp only a limited amount of material at any one time. It stands to reason, accordingly, that if one is confronted with many columns of figures, even the main essentials of the business may escape his atten tion. It is therefore 'important to prepare special schedules and statistical statements apart from the main st,atements.
As a rule, statistical statements proper take up what might be called the non-fmancial side of the business. Thus, for instance, plant statements are often pre pared to cover the unit production, or possibly the unit cost. To be more concrete, a telephone com pany, for example, will prepare a plant statement showing the amount 'and cost of all new construction work carried out. Such a statement would show in terms of miles the amount of wire put up, dis tinguishing copper, iron, and steel wire. It will show also the number of exchanges, or private tele phones installed, and other items -of similar nature.
Statements of this kind are often made because they are used as a means of throwing additional light on the condition of the business, showing its progres sion or retrogression in what might be called the physical aspect of the business.
7. Departmental statements.—Just as it is impor tant to obtain classified business information on the condition of a business as a whole, it is equally im portant to follow out the results of different depart ments or of individual functions. It is thus advis able to prepare special profit and loss statements from each department of a business. It is equally desirable to prepare departmental statistics.
In order to manage his department right, the head should have before him regularly prepared statements that will keep him in close touch with the detail and routine of his department. A monthly con densed statement, supported perhaps by weekly sum maries and daily reports, giving full details of the revenue and expenses of his department, reveals to him in chronological order, all the facts which are nec essary to give him a complete survey.
8. Purpose of financial statements.—The main pur pose of a financial statement is to show the condition of a business in a more condensed form than is avail able from an examination of all the facts shown in the records. This information, if arranged in an intelli gible and readable form, will be used by the manage ment and persons outside of the management, such as stockholders, bankers and investors. These state ments will be examined to check up the efficiency in operation and in management. They will also be used to determine the value of the assets, the present financial condition, and the probable future earnings.
9. Prerequisites of the executive.—An executive who is to make the most of various statements which are brought to his attention not only must possess a broad knowledge but also must be able to draw upon many sources of information. He must understand the basis upon which assets are valued, and be com petent to pass upon the relative values of various ac counts or groups of accounts as compared with other and different groups. Moreover, he must have a knowledge of accounting terms and their true mean ing, and a knowledge of the principles underlying the construction of financial statements. Finally, he must be able to pick out the false from the true and to know what is omitted from a statement as well as what has been furnished. It will be readily seen, therefore, that sometimes it is vastly more important to deduce the information which the accounts fail to disclose than to understand that which they re flect.