If you think about your own business,
you'll find that you ask yourself this question probably multiple times a day.
Where are we at right now?
Or how did we perform today, or last week, or over the last quarter?
These questions just come up as you're trying to run an organization, and
think about how to run a business.
In fact, even if I talked to my children about what's happening when they're trying
to run a lemonade stand, the same two questions come up.
I say, guys, what do you need to know?
And they'll say, well, what do we have right now?
How many lemons do we have?
Do we have tools to squeeze the lemons?
Do we have a table to put it all on?
And we need to know how we did over time.
Was it worth it for all of us to be out here?
Maybe their friend Sam was only there in the morning so he should only get paid for
that period of time.
So they're answering the same two questions.
As societies realized they kept coming back to these same two questions,
they realized it wasn't very efficient to keep recreating the answers each time
somebody asks them, and they decided they should start formalizing them.
As they formalized them, they realized,
well, we could create some sort of a tool that would get at each of these.
For the first question, what is the financial condition
of the organization on a given day, they created the Balance Sheet.
Now the second question, how did we do over time?
They created something called the income statement.
Pretty quickly, some clever people started to figure out, hey,
if the balance sheet's telling us where we were at at the beginning of the period,
and where we were at at the end of the period and the income statement's telling
us what happened over the period, then we should be able to tie the two together.
So they created this statement of stockholders' equity.
The three of these items together are all based on something called
accrual accounting.
Our next video is going to cover accrual accounting and then actually I'm going to
do videos on the balance sheet and income statement just after those.
So we'll fill all of this in with more detail.
Now even though accrual accounting's a great tool, this question of how well did
the organization perform over a certain time period is pretty complicated.
And people started to realize it would be useful to have an alternative
way of thinking of that too.
So the cash flow statement was created to help to answer that second question.
Now that we know about the two big questions in life, and
the fact that we're going to try to create tools to answer them, I want to talk
a little bit about the bigger environment in which accounting occurs.
There's underlying operations of every business entity, and I've already said
the idea of the financial statements is to capture those underlying operations so
that managers can use that to make decisions.
Now often in these financial statements provide the manager with
everything they need to know in order to make a decision.
But sometimes the financial statement doesn't quite give them the information
they want to have.
You may have to adjust the financial statement a little bit or
you might even have to go back to the underlying operations of the business and
grab some more information.
So you might supplement the financial statements with some sort of managerial
report, and combined with the financial statement, reach your decision.