Basic Accounting
Financial Statements
There are three kinds of financial statements that are necessary for interpreting the financial position of a firm. This page gives you a brief introduction to each of them.
Balance Sheet
Balance Sheets are a snapshot of the resources that a firm has, or in other words, its assets, as well as the claims against these resources, which may be either liabilities or equity, at a specific point in time. All resources owned by a firm are acquired using funds provided from outside parties; as such, each resource must have an outside claim against it which is equal to its own value. Thus, we can make the following cumulative generalization:
ASSETS = LIABILITIES + EQUITY
The Golden Rule of Accounting is that every transaction has an equal and opposite set of components. As such, the above equality must always hold. Here is the basic structure of a Balance Sheet:
| Balance Sheet | |||
|---|---|---|---|
| Assets | |||
| Short-Term Assets | $500 | ||
| Long-Term Assets | $2000 | ||
| Intangible Assets | $1000 | ||
| Total Assets | $3500 | ||
| Liabilities and Equity | |||
| Short-Term Liabilities | $300 | ||
| Long-Term Liabilities | $1800 | ||
| Equity | $1400 | ||
| Total Liabilities and Equity | $3500 | ||
Income Statement
Income Statements are a synopsis of a firm’s operating activities over a certain period of time. They list the firm’s revenues and expenses, and the difference between these two represents the firm’s net income or net loss over that period. This statement covers only the proceeds from sales and expenses associated with creating the goods or services in question; other types of transactions, such as financial or investment transactions, are not recorded here. Here is the basic structure of an Income Statement:
| Income Statement | |||
|---|---|---|---|
| Revenues | $5000 | ||
| Cost of Goods Sold | $2000 | ||
| Sales, General and Administrative Expenses | $1500 | ||
| Interest | $500 | ||
| Taxes | $350 | ||
| Expenses | $4350 | ||
| Net Income | $650 | ||
Cash Flow Statement
Cash Flow Statements are a synopsis of a firm’s cash inflows and outflows over a certain period of time. They list the firm’s receipts and payments over that period. This statement covers not only the cash received and spent in the firm’s operating transactions, but also cash involved in other types of transactions, such as financial or investment transactions. Another difference between this statement and the income statement is that this statement takes into account cash flows only, and does not account for transactions undertaken on a credit, or non-cash, basis. Here is the basic structure of a Cash Flow Statement:
| Cash Flow Statement | |||
|---|---|---|---|
| Net Income | $650 | ||
| Cash Flow from Operations | $2000 | ||
| Cash Flow from Investments | ($1500) | ||
| Cash Flow from Financing | $1200 | ||
| Net Cash Flow | $1700 | ||
| Net Cash | $2350 | ||
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