Abstract
This paper has three purposes. The first is to briefly explain the important relationship some key concepts have to the financial statements. The second is to provide a brief explanation of the financial statements’ format. The third purpose is to illustrate examples of accounts that exist within the asset, liability, and stockholder’s equity categories by use of a table.
Concepts Important to Financial Statements
Generally Accepted Accounting Principles (GAAP)
Maintaining the consistency and reliability of financial statements within various business industries and sectors is important to prospective investors and creditors who rely on the data presented in the financial statements. This consistency is accomplished by entities adhering to GAAP as promulgated by various accounting boards and not adhering to GAAP will be to mislead prospective investors and creditors.
International Financial Accounting Standards (IFRS)
Business entities are becoming increasingly global in nature thus requiring the development of international standards to be followed. These international standards as promulgated by the IFRS serve to form the basis of a common accounting methodology shared by participating countries, facilitating financial statement preparation and presentation globally.
Securities and Exchange Commission (SEC)
Maintaining the integrity of financial statements requires a policing body enforcing its enacted rules. The SEC Act of 1933 established such and was further enhanced with the SEC Act of 1934.
Annual Reports
Maintaining investor’s and creditor’s knowledge and assisting the SEC concerning an entity’s past and present financial condition is accomplished via the annual reports. The 10-Q is filed quarterly and the 10-K annually to provid key financial statement information necessary to investors, creditors, and the SEC.
Financial Statement Format
Income Statement
The income statement begins by listing the sales revenue generated during the period stated. The costs to generate the revenues are subtracted to present the gross margin. If the entity is a merchandiser the cost are termed Cost of Goods Sold, if the entity is a manufacturer the costs are termed Costs of Goods Manufactured. The level of detail sought determines the remaining format. A very simple income statement will list all expenses necessary to conduct business, and totaling these expenses and deducting the total from the gross margin to arrive at net income before taxes. The estimated tax liability is deduction from the net income before taxes rendering the final net income after tax figure.
Balance Sheet
The balance sheet is logically structured by presenting the assets section first with its accompanying grand total followed by the liabilities and stockholder’s equity section with their respective totals and grand total. When a more detailed balance sheet is sought the assets and liabilities sections will be presented listing the current assets/ liabilities separated from the noncurrent assets/liabilities enabling a user to better implement the balance sheet.
Statement of Cash Flows
Statement of Retained Earnings
This statement’s format is the simplest since the least amount of information is required to present it. The Beginning Retained Earnings balance is listed first followed by the period’s net income/loss less the dividends declared arriving at the Ending Retained Earnings balance.
Examples of Assets, Liabilities, and Stockholder’s Equity Accounts
The table below lists examples of common accounts categorized as asset, liability, or stockholder’s equity accompanied by the usual debit or credit balances.
References
International financial reporting standards. (2014), Wikipedia. Retrieved from
http://en.wikipedia.org/wiki/International_Financial_Reporting_Standards
Kieso, D. E., & Weygandt, J. J. (1992). Intermediate accounting. New York, NY: John
Wiley & Sons, Inc.
