Definitions:
Financial statements are reports prepared by a company's management to present
the financial performance and position at a point in time. A general-purpose set of
financial statements usually includes a balance sheet, income statements,
statement of owner's equity, and statement of cash flows.
Financial statements are the main source of financial information for most decision
makers. That is why financial accounting and reporting places such a high
emphasis on the accuracy, reliability, and relevance of the information on these
financial statements
financial accountants prepare financial statements in the following order:
1. Income Statement
2. Statement of Retained Earnings—also called Statement of Owner’s Equity
3. The Balance Sheet
4. The Statement of Cash Flows
Income statement
The income statement, sometimes called an earnings statement or profit and loss
statement, reports the profitability of a business organization for a stated period of
time. In accounting, we measure profitability for a period, such as a month or year,
by comparing the revenues earned with the expenses incurred to produce these
revenues. This is the first financial statement prepared, as you will need the
information from this statement for the remaining statements. The income
statement contains the following:
Revenues are the inflows of cash resulting from the sale of products or the
rendering of services to customers. We measure revenues by the prices
agreed on in the exchanges in which a business delivers goods or renders
services.
Expenses are the costs incurred to produce revenues. Expenses are costs of
doing business (typically identified as accounts ending in the word
“expense”).
Revenues – Expenses = Net Income. Net income is often called the
earnings of the company. When expenses exceed revenues, the business has
a net loss.
Owner’s Equity:
Owner’s equity consists of the net assets of an entity. Net assets is the difference
between the total assets and total liabilities. When the owners are shareholders, the
interest can be called shareholders’ equity; the accounting remains the same, and it
is ownership equity spread out among shareholders.
Assets – Liabilities = Owner’s or Shareholders’ Equity
Balance sheet:
The balance sheet lists the company’s assets, liabilities, and equity (including
dollar amounts) as of a specific moment in time. That specific moment is the close
of business on the date of the balance sheet. Notice how the heading of the balance
sheet differs from the headings on the income statement and statement of retained
earnings. A balance sheet is like a photograph; it captures the financial position of
a company at a particular moment in time.
statement of cash flows
The statement of cash flows summarizes the effects on cash of the operating,
investing, and financing activities of a company during an accounting period; it
reports on past management decisions on such matters as issuance of capital stock
or the sale of long-term bonds. The main purpose of the statement of cash flows is
to report on the cash receipts and cash disbursements of an entity during an
accounting period. Broadly defined, cash includes both cash and cash equivalents,
such as short-term investments in Treasury bills, commercial paper, and money
market funds. Another purpose of this statement is to report on the entity’s
investing and financing activities for the period. The statement of cash flows
reports the effects on cash during a period of a company’s operating, investing, and
financing activities. Firms show the effects of significant investing and financing
activities that do not affect cash in a schedule separate from the statement of cash
flows.
