- Accounting Topic
- Financial Ratios Topic
Introduction to Financial Statements
Introduction to Financial Statements
Financial statements are the final result of the accounting system. Stakeholders interpret financial statements to help make business, lending, and investment decisions. Each individual statement has an important role in helping users understand more about the reporting entity. Only when all of the individual statements and the notes to the financial statements are reported together does the user have a complete financial picture.
The Income Statement
Defined / Example
The first question a stakeholder likely has about any business is whether the business makes money or not, referred generally as profitability. If a business has a profit for a given time period, the revenue (money earned) exceeds expenses (money paid out for business and non-cash expenses). Profit or loss (also referred to as net income or net loss) is reported on the income statement for a given period of time, typically 3 months or 1 year. The ending profit or loss will be combined with prior profit and loss reporting on the balance sheet financial statement. The income statement and balance sheet are therefore related.
Depending on the business type the income statement might be called a profit and loss statement or other names. Different accounting methodologies can also produce different profit and loss results for the exact same business as long as it is reported consistently. The two general methodologies: Cash basis and accrual basis, will be covered in another lesson.
Reports the profit and loss activity for a specified period of time
- Different accounting methods produce different income statement results
- The ending profit or loss will be reported on the balance sheet.
The Balance Sheet
Defined / Example
Defined / Example A stakeholder may also be interested in the assets, liabilities, prior performance, and investors a business has. The balance sheet reports this information in the form of Assets, Liabilities, and Equity. Assets include cash, accounts receivable, equipment, inventory, and more. Liabilities include accounts payable, notes payable,