Financial statements are of value to business owners, business buyers, business sellers, investors and lenders. Financial statements may be prepared by the accounting department of a company or by an outside accounting firm. If prepared by an outside accounting firm, they may be audited or unaudited. Most are unaudited.

Financial statements usually include the following: (1) a balance sheet, (2) a statement of income and expenses, (3) a statement of cash flow, and (4) a statement of changes in equity. Nonprofit entities, including homeowner associations, use a similar financial statement format using different names.

A Glossary of Accounting Terms and a Glossary of Tax Terms has been provided to assist in understanding financial statements Financial statements are used to analyze a company's performance.

 

Balance Sheet

The balance sheet of a company shows the company's assets, liabilities, and equity or net worth as of a certain date. This is usually at the end of an accounting period which may be the end of a month, calendar year or fiscal year.

Assets include but are not limited to: (1) cash, (2) cash equivalents (3) accounts receivable (4) inventory, (5) equipment, (6) machinery, (7) trademarks, patents, and goodwill, (8) investments, and (9) real estate.

Liabilities include, but are not limited to: (1) accounts payable, (2) loans payable, (3) wages payable, (4) dividends payable, and (5) taxes payable.

Equity or Net Worth is the difference in dollars between assets and liabilities.

The descriptions above are general descriptions. Assets and liabilities can and are generally broken down into far greater detail on the balance sheet of a company.

 

Statement of Income and Expenses

Income, often referred to as Revenue, is usually divided into: (1) operating income, (2) non-operating income, and (3) other income.

Operating income is the revenue generated by selling a company's services or products.

Non-operating revenue is generated from non-core business activities such as interest earnings or other miscellaneous sources. Other income would generally come from the sale of an asset not needed by the company.

Operating Expenses are the costs a business incurs to run its normal operations. They are indirect costs that are not directly related to the production of a product or service.

Examples include: (1) rent, (2) utilities, (3) payroll, (4) insurance, (5) advertising, and (6) employee benefits.

Gross Income is the difference between Operating Income and Operating Expenses.

 

Statement of Cash Flow

A Statement of Cash Flow is similar but not identical to a Statement of Income and expenses. A Statement of Cash Flow focuses exclusively on cash. Not all cash received is income and not all cash paid out is an expense.

 

Statement of Changes in Equity

A Statement of Changes in Equity, also known as a Statement of Retained Earnings or Statement of Owner's Equity, is a report that shows how a company's equity or net worth calendar or changed over a period of time It will generally reflect the equity each month of over a calendar or fiscal year.

 

Cost Accounting

Managerial Accounting

Accountant's Opinion

Off-Balance Sheet Assets and Liabilities