Overview of Accounting

Financial statements, with all the uncommon jargon and numbers floating around, can be intimidating to the uninformed. At the most basic level financial statements show us where the money is—where it came from, where it went, and where it is now. A financial statement could be thought of as a snapshot of a company’s financial position at a specific time. There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholder’s equity (Securities and Exchange Commission, 2007). Let’s discuss the types of financial statements, and who they are directed towards, in more depth.

Financial statements are sometimes simply called “financials.” Balance sheets, income statements, and cash flow statements are all included in outside distributed reports to stockholders and debt holders (Tracy, 2005). If your business is a public business, these reports must also be filed with the Security and Exchange Commission (SEC), thus becoming public record. Contrastingly, financial reports of private businesses are only sent to owners and lenders of that business.

So what are the differences between the different types of financial statements: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholder’s equity? Does a “balance sheet” show how a company balances out its monies? Do income statements tell us about every penny earned? Is the flow of money in and out of the business explained in a cash flow statement? Finally, how much is the shareholder’s equity truly worth?

Balance sheets provide detailed information about s company’s assets, liabilities, and shareholder’s equity. An asset is anything that a company owns that have worth-physical property, trademarks, patents, cash, and investments are examples. Any money that a company owes is considered a liability such as rent, loans, money owed to suppliers, payroll, or taxes. Capital or net worth is shareholder equity and is the money left over after all assets are sold and debts are settled. A simple formula to demonstrate what a balance sheet shows is: ASSETS = LIABILITIES + SHAREHOLDER’S EQUITY

Income statements report profits for a specified period- monthly, quarterly, or yearly. Total profits are list for the time period with deductions for costs related to the earnings (SEC, 2007). After all costs are subtracted, you are left with the company’s “bottom line.” Internal income statements are much more expansive than external income statements. Managers and board of directors can determine the direction the company is headed from income statements.

Managerial accounting prepares internal financial statements to help managers do their jobs. These reports help managers plan, make decisions and control business functions. These reports are considered confidential and are not shared outside the firm.

Cash flow statements are the third type of financial statement. Cash flow statements report “three types of activities: (1) operating, (2) investing, and (3) financing” (Tracy, 2005). Operating activities is an analysis of a company’s cash flow from income or losses. Investing activities reflect purchases or sales of assets. Financing activities show how