This entry is part 2 of 8 in the series Intro to Financial Reporting
According to Lasher’s “Practical Financial Management,” the three financial statements of interest to us are the income statement, the balance sheet, and the statement of cash flows (Lasher, 2008, p. 26).
The income statement’s name is pretty self-explanatory. That is, the income statement reports “how much money a company has earned [and spent] during the accounting period” (Lasher, 208, p. 28). A public, or external, income statement may be very vague while a income statement that is used internally may include much more detail. Despite these differences, the net income will be reported as the same. Net income goes by some other names as well, including “earnings” or “profit” (Lasher, 2008, p. 30). When a company loses money, net income is referred to as net loss. One important thing to note is that “net income is not equivalent to cash in the firm’s pocket” (Lasher, 2008, p. 30). This is because many businesses make sales on credit.
While the income statement shows the movement of money within a firm, a balance sheet depicts a snapshot of “everything a company owns and everything it owes at a moment in time” (Lasher, 2008, p. 30). This includes a firm’s assets, liabilities, and equity. For those who aren’t familiar, this depicts the entire accounting equation: assets = liabilities equity (Lasher, 2008, p. 30). Assets are “things,” whether physical of financial, that a company owns. This includes everything from real estate to manufacturing equipment and even stocks or bonds in other companies. Assets are listed in descending order of liquidity on the balance sheet (Lasher, 2008, p. 31). Meanwhile, liabilities includes money that the company owes, ie: debt. Liabilities are listed in order of when they are due. The final portion of the equation is equity. Equity is money put into the business by its owners. . The two types of equity are direct investment and retained earnings (Lasher, 2008, p. 39).
The statement of cash flows helps to figure out how much cash the company is really making in the short run (Lasher, 2008, p. 30). In other words, the statement of cash flows shows “where the firm’s money came from and what it was spent on” (Lasher, 2008, p. 70). Another name for the statement of cash flows is the “statement of changes in financial position.”
Lasher, William R. (2008). Practical Financial Management (5th ed.). Thomson South-Western.