Formal Financial Statements
The objective of this lesson is not so much a how to do it; but, to inform, introduce, and make you aware of the basic financial statements.
Let's start this lesson by reviewing a few definitions.
Financial Statements are summary accounting reports prepared periodically to inform the owner, creditors, and other interested parties as to the financial condition and operating results of the business.
The four basic financial statements or reports are:
Balance Sheet -The financial statement which shows the amount and nature of business’s assets, liabilities, and owner’s equity as of a specific point in time. It is also known as a Statement Of Financial Position or a Statement Of Financial Condition. The format of the Balance Sheet is the same for all types of organizations except corporations that have a "special" Owner's Equity Section.
Income Statement -The financial statement that summarizes revenues and expenses for a specific period of time, usually a month or a year. This statement is also called a Profit and Loss Statement or an Operating Statement.
Capital Statement (Statement of Owner's Equity) -The financial report that summarizes all the changes in owner’s equity that occurred during a specific period. Like the Balance Sheet, the format of the Capital Statement is the same for all types of organizations except corporations that have a "special" Owner's Equity Section.
Cash Flow Statement -The financial statement that reports the sources and uses of cash for a specific period of time, normally a year.
Order Of Preparation
Because some of the statements use information from other statements, the statements are prepared in the following order:
1. Income Statement
2. Capital Statement
Uses Information from the Income Statement
3. Balance Sheet
Uses Information from the Capital Statement
4. Cash Flow Statement
Uses Information from the Balance Sheet, Capital Statement, and the Income Statement
Let's move on to discuss Income Statements.