Every corporation has, from the moment it is formed, an
indefinite life under the law. The corporate laws of every
state grant the right to perpetual existence to a corporation in
order to enable management to take strategic actions that will
have long-term impact on the company’s survival and growth.
These include the ability to make long-term contracts, the ability
to issue certificates of ownership (stock) that don’t expire,
and so on.
As many have learned over the years, however, that is really
only a legal definition. In reality, most companies follow a pattern
of birth, rapid growth, slowing growth, plateau or no
growth, decline, and demise.
Companies that react effectively to changes can minimize or
even avoid the decline and escape the demise, but those are
natural phases in the life cycle.
Unfortunately, the vast majority of new companies follow
this pattern; eventually most close their doors. If you were even
a moderate investor in the dot-com era of the ’90s, you are likely
able to rattle off a half dozen names that no longer exist
The Structure and
Interrelationship of
Financial Statements

The Structure and Interrelationship of Financial Statements 13
(hopefully not because you owned them). Even outside the
technology industry, there are companies that didn’t have the
right stuff to remain independent and they’ve fallen. Names that
are rapidly fading into history include TWA and, more recently,
Enron, Adelphia, and Worldcom.
As this is written, experts are predicting that 2002 will be
the second record year in a row for corporate bankruptcy filings.
Even if you allow that many of those filings were strategic
moves to get relief from the demands of union contracts or loan
agreements, it’s still a matter of managers unable to live up to
the commitments they once made in good faith.
Many more companies that didn’t actually close their doors
have been bought by other companies and, as a result, lost
their separate existence, instead becoming merely a part of a
larger, more successful company. You can still see names like
Compaq, Time Warner, Texaco, RCA, and Chrysler. Yet none of
these companies exists today as a stand-alone entity.
Yet the good companies continue to grow and seem to postpone
indefinitely the time of their often-predicted demise
through successive periods of renewal, rebirth, and resurgence.
Birth
Rapid growth
Slowing growth
Plateau
Decline
Demise


(hopefully not because you owned them). Even outside the
technology industry, there are companies that didn’t have the
right stuff to remain independent and they’ve fallen. Names that
are rapidly fading into history include TWA and, more recently,
Enron, Adelphia, and Worldcom.
As this is written, experts are predicting that 2002 will be
the second record year in a row for corporate bankruptcy filings.
Even if you allow that many of those filings were strategic
moves to get relief from the demands of union contracts or loan
agreements, it’s still a matter of managers unable to live up to
the commitments they once made in good faith.
Many more companies that didn’t actually close their doors
have been bought by other companies and, as a result, lost
their separate existence, instead becoming merely a part of a
larger, more successful company. You can still see names like
Compaq, Time Warner, Texaco, RCA, and Chrysler. Yet none of
these companies exists today as a stand-alone entity.
Yet the good companies continue to grow and seem to postpone
indefinitely the time of their often-predicted demise
through successive periods of renewal, rebirth, and resurgence.


Finance for Non-Financial Managers


available information. The
difference between the
carrying value of the
assets and that of the liabilities
is the equity interest
accruing to the owners
of the company. The balance
sheet will be discussed in detail in Chapter 3.
The Income Statement
The income statement recaps all of the activities of a company
intended to produce a profit. It shows the amount of sales, all
the costs incurred in making those sales, and all the overhead
costs incurred in running the operations of the company so it
would be able to deliver on its promises to customers. This
statement goes by various names, including income statement,
profit and loss (P&L) statement, statement of income and
expenses, operating statement, etc. In this book we’ll call it the
income statement, but
keep in mind that your
company may call it
something different. All
companies that keep their
accounting records on the
traditional accrual method
produce a statement similar
to this. The income
statement will be discussed
in Chapter 4.
Statement of Cash Flow
The income statement shows activities that were recorded with
accrual basis accounting. However, companies that keep their
books using accrual accounting still will have transactions that
do not appear on the income statement, usually involving the