Agriculture Reference
In-Depth Information
The importance of fi nancial statements
Financial management requires a working knowledge of how to interpret fi nancial informa-
tion from a fi rm's records. Such information is used to satisfy two distinct needs of the
agribusiness fi rm. First, and perhaps more importantly, is the need for information that can
be used internally by managers in decision-making. Second, information is also needed for
fi nancial reporting, such as reporting fi nancial performance to stockholders, entities outside
the fi rm such as lenders, and others who have interests in the fi rm.
Without fi nancial information, agribusiness managers at any level fi nd it diffi cult to
successfully pursue the goals and objectives of the organization. Each agribusiness
enterprise therefore must accumulate historical records of fi nancial information that are vital
for its continued success. The importance of fi nancial information and records is evidenced
by the tons of paper, the billions of forms, the millions of computers, and the hundreds
of thousands of people who are employed in recording business activities throughout the
country.
Modern fi nancial record keeping had its beginning some six centuries ago in Italy. The
growth of commerce in Venice and Genoa, which were great commercial centers, created an
accompanying need for business records. As a response to this need, a system of records
and bookkeeping was developed that is still widely used throughout the world today. This
system summarizes the records of a fi rm by dividing them into two basic documents.
These documents are called the balance sheet and the income statement. Together, they
make up the primary fi nancial statements of the fi rm. The remainder of this chapter will be
used to discuss the importance of these fi nancial statements and illustrate how agribusiness
managers may use these statements for decision-making.
Correct information at the proper time
Agribusinesses seek to generate the greatest possible returns from the resources they pos-
sess. Associated with the profi t objective are several other objectives, such as producing a
quality product or service, rewarding the employees of the business, helping the business
grow, striving for environmental stewardship, and promoting a positive public image for the
fi rm as a “citizen” of the community. These types of objectives are common to all business
organizations, from the huge food company to the rural, small-town feed dealer. Such objec-
tives are usually not accomplished by means of a single, brilliant tactical maneuver,
but rather through the consistent use of resources to their greatest potential over a long
period of time. The consistent use of resources to meet the fi rm's objectives requires
managers to have useful and timely fi nancial information and records. Business records are
tools to help managers guide the operation of the business intelligently and make good man-
agement decisions that are consistent with the needs, objectives, and goals of the company.
The collection and use of information reported for these purposes is often referred to as
managerial accounting
.
In addition, fi rms must also satisfy the reporting requirements that are established by
various outside entities. For instance, every agribusiness must keep track of sales, purchases,
expenses, and profi t or loss. Records that document these areas are necessary to meet the
reporting requirements of governmental units, lending institutions, investors, and suppliers
to the business. The collection and use of information reported for these purposes is often
referred to as
fi nancial accounting
.
