The Balance Sheet is a "snapshot" : it
represents, at a moment in time, the financial position of the
business entity. It needs to be compared to other
"snapshots" to provide meaningful information on
changes in financial position. For that reason, the balance sheet
from the preceding year is usually provided.
The other primary financial statements --- the Income
Statement and Statement
of Cash Flows --- present a summary of
activities over a period of time, usually a fiscal year. The Income
Statement presents revenues less associated
expenses and the resulting net income. The Statement of
Cash Flows provides information about the
sources and uses of cash.
The Balance Sheet
The Balance Sheet (statement of Financial Condition) is so
named because it represents the following equation:
At any point in time this basic equation holds, although the
amounts assigned to the individual elements will fluctuate.
Assets increase or decrease as resources are obtained,
disposed of, become less valuable, or become used up (expensed)
in the course of operations.
Liabilities increase or decrease as obligations are incurred
or liquidated. In some cases, liabilities may need to be
estimated and are subject to adjustment (upward or downward) in
Equity increases or decreases primarily as a result of income or loss from operations of the business. It also increases when the owners contribute capital to the business, and decreases when the capital is withdrawn or dividends are paid.
The Income Statement
The Income Statement (or statement of Operations) is a
tabulation of revenues and expenses, the latter usually, but not
always, broken down (or summarized) by major categories, as
Operating income is an important measure of the company's
performance, since it represents the pre-tax income earned (or
loss incurred) from the core operations of the business, before
considering financial costs, other non-operating items, and
extraordinary gains or losses.
Other income and expenses includes finance costs and other
items the occurrence of which are tangential to the primary
purposes of the business, (e.g., losses on abandoned or sold
Net income or loss is the all-inclusive "bottom
line" that reflects all economic activity by the enterprise
for the period being reported on (year, quarter, month, etc.),
except for transactions with owners.
The Statement of Cash Flows
The Statement of Cash Flows reports the sources and uses of
cash for the period, as analyzed into the three major
Operations include the cash effects of essentially all items
identified in the income statement, such as sales, costs of
sales, operating expenses and extraordinary items.
Investing activities include the purchase of plant, property
and equipment or the proceeds from the disposition thereof, and
also certain investments in securities or other non-operating
Financing activities include the borrowing and repayment of
debt, as well as the contribution and redemption of equity
capital and the payment of dividends on the capital.
Elements of Financial Reports
In addition to the basic financial statements, most financial
reports done by Certified Public Accountant will have a section
of Notes to the Financial Statements.
If a Certified Public Accountant has been associated with the
financial statements, a report will be included with the
statements. The report will identify what level of professional
service was provided --- an audit, a review, or a compilation
--- and indicate what conclusions, If any, were reached regarding
the financial statements. An audit is conducted "in
accordance with generally accepted auditing standards", a
review or a compilation is conducted "in accordance with
standards established by the Institute of Certified Public
Accountants". These standards assure you that the service we
provide meets all the stringent requirements of modern financial
reporting. In the case of an audit, the C.P.A. will provide
positive assurances that the financial statements "present
fairly" the financial position and results of operations in
accordance with generally accepted accounting principles, if it
can be concluded that such is the case. In a review engagement,
at best the accountant will express negative assurance --- i.e.,
that based on limited procedures no reason was found to doubt
that the financial statements were fairly presented. An
accountant conducting a compilation merely assembles the
financial statements and offers neither positive nor negative
The notes to financial Statements set forth the major
accounting principles used in developing the amounts reported in
the statements (where a choice was made from alternative
generally accepted accounting principles or GAAP), and also
provide additional details about major accounts and transactions.
Examples of the latter include details about long-term leases,
long- and short-term debt (including interest rates and
maturities), transaction with related parties, and contingent
liabilities and commitments.
Financial reports may also contain supplementary schedules, which provide more detailed information about major expense captions (such as administrative expenses, costs of goods sold, other income and expenses, etc.) and other items appearing in the basic financial statements.