The companies tell their stories through financial statements. Liquidity, earning potential and how companies leverage debt is just some of the information that can be gleaned from financial statements. Understanding the elements that make up the financial statements leads to a better understanding of how changes in financial elements from one year to the next affect the health and viability of an organization. The following are some basic financial statements and the financial elements comprised within them.
Balance Sheet
The balance sheet is a snapshot of assets, liabilities and owner’s equity for a company. Assets should equal to liabilities plus equity. With this formula, it is possible to determine any of these elements if the other two are known. Specifically, the amount of equity in an organization is determined by subtracting liabilities from assets.
Statement of Owner’s Equity
The statement of owner’s equity tracks investments and distributions for a given period. Investments are added to the beginning capital and net income to increase equity. Distributions or dividends are paid out to owners or stockholders and decrease the equity. After investments and distributions are properly calculated into the statement of owner’s equity, the final calculation is the equity balance for the given period.
Income Statement
The income statement tracks several financial elements over a given period. If a company were to track its income for a year, it would start with sales/revenue and subtract the cost of sales/revenue to obtain gross profit. Expenses would then be listed on the income statement and classified as various types of expense like operating expenses or administrative expense. The gross profit minus expenses leaves the operating income. Gains and losses that occurred outside normal business activities would then be listed. These might include a loss from a lawsuit settlement or a gain from the sale of an investment. The final calculation is the net income. All of these activities constitute comprehensive income.
Balance sheets, income statements and statement of owner’s equity are three basic financial statements. They capture all of the ten financial elements. These items make understanding a company’s fiscal status simple.
References
financelreading.com. (n.d.). Sale of Fixed Assets. Retrieved January 21, 2016, from Financereading.com: http://financereading.com/sale_of_fixed_assets.htm
Quickmba.com. (n.d.). The Four Financial Statements. Retrieved January 21, 2016, from Quickmba.com: http://www.quickmba.com/accounting/fin/statements/
