CheckPoint Financial Statements
Consider that you have been asked to explain financial statements to someone who knows nothing about accounting.
Review the information on financial statements in Ch. 1 of Fundamental Accounting Principles.
Discuss, in 200 to 300 words, each of the four financial statements. Explain the different components of the statements as well as what the statements tell about a business.
There are four main financial statements. They are: (1) income statement; (2) Statement of owner’s equity; (3) balance sheet; and (4) statement of cash flows. Income statements show how much money a company made and spent over a period of time. Balance sheets show what a company owns and what it owes at a fixed point in time. Statement of cash flow shows the exchange of money between a company and the outside world also over a period of time. The fourth financial statement, called a “Statement of owner’s equity,” shows changes in equity from net income (or loss) and from the owner’s investments and withdrawals over a period of time. The changes in assets and liabilities that you see on the balance sheet are also reflected in the revenues and expenses that you see on the income statement, which result in the company’s gains or losses. Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement. No one financial statement tells the complete story. But combined, they provide very powerful information for investors. And information is the investor’s best tool when it comes to investing wisely.