Financial Statements

Axia College of University of Phoenix

There are four main financial statements that are used to evaluate business decisions. The four financial statements are: balance sheet, income statement, retained earnings statement, and statement of cash flows. Each financial statement has a unique purpose to serve. A balance sheet presents a company’s overall financial condition. The balance sheet has many components to it. The components of a balance sheet include: (1) assets, liabilities, and (3) stockholder’s equity. The resources owned by a business are called assets. Assets are composed of current assets such as cash and cash equivalents, accounts receivable, and inventories. Assets also include fixed assets such as property, plant, and equipment. The amounts owed to creditors are called liabilities. Liabilities are composed of current liabilities such as accounts payable, notes payable, and accrued liabilities. Liabilities also include long term liabilities. Stockholder’s equity is defined as the stockholder’s claim on the total assets. Stockholder’s equity can be calculated as follows: “assets minus liabilities equal stockholder’s equity.” A person who evaluates the balance sheet can figure out if company has enough assets to cover its liabilities, and if the stockholder’s equity is good enough to satisfy the stockholders. A balance sheet answers many questions in regards to the company. For example, one can use the balance sheet to figure out if the company relies on debt or stockholder’s equity to finance most of its operations. A balance sheet basically is a picture that depicts the company’s overall financial health. An income statement details the earnings and expenses over a period of time. It has many components that include: revenues cost of operations, operating expenses, nonoperating expenses, income tax, and net earnings. Revenues is the total sales a company produced in a given time period. The cost of operations is the cost of producing the merchandise the company makes. Operating expenses include the selling, administrative costs, depreciation, and research costs. Nonoperating costs include mostly interest expenses. Income tax is an expense the company pays to federal and state government based on earnings. A net earnings is the final amount of money made after the all of the expenses are factored. The main function of an income statement is to figure out if the company is profitable. Is the company making money every year or losing money? For example, if a creditor questions if a company is good enough to lend to, one of the first financial statements they’d look at is an income statement. A retained earnings statement shows the changes of retained earnings of a given period. When a company is profitable, it usually shares its profits to its stockholders through dividends. This statement is used to evaluate if the company is worth investing in. Several answers can be answered just by analyzing this particular statement. A creditor will immediately know if the company is profitable and if it pays out to its owners. An investor will see if the company has