FINANCIAL STATEMENTS

Entities that perform any kind of business have the need to record their financial activities for their own
future use. And because they need to be clearly understood also from outside readers (government agencies,
accountants, firms, etc.) they need to follow accounting standards that were developed throughout the time.
These standards are called financial statements.
Financial Statements can be performed in four main different types depending on its purpose.
Although they are all related for a complete understanding of the companys financial situation. The main
financial statements are: Balance Sheets; Income Statements; Cash Flow Statements; and Statements of
Shareholders Equity. While the four of them work together for a better understanding of the business financial
situation, each of them have a specific purpose.
The Balance Sheet presents the companys financial position at the date indicated in its heading. It
shows the total amount of assets, liabilities and shareholders equity that the company own and owes to other
parts. The goal of this statement is to show that the companys assets are balanced with the sum of the liabilities
and shareholders equity.
The assets can be either current or noncurrent. Current assets are those items that will be consumed
within one year. Noncurrent assets are those items expected to keep providing benefit to the company for more
than one year. While the assets are classified based on how quickly they will convert into cash, the liabilities are
listed based on their due dates. The liabilities can be divided into current or long-term. The current liabilities are
the debts planned to be paid off within one year. Long-term liabilities are debts payable more than one year
away.
Income Statements also show what the company has earned and spent over a specific time period.
However differently than the Balance Sheets, it shows the revenues and expenses by giving a summary through
both operating and non-operating activities. It also reports the Earnings per Share (EPS), which is how much
shareholders would receive if the company divided its earnings. The EPS serves as an indicator of the
companys profitability.
The Cash Flow Statement shows the companys inflows and outflows of cash during the time interval
specified in its heading. Its main difference from the other financial statements is that it is not focused on
showing the companys profit but if the company has generated enough cash to pay for its expenses and to
purchase assets by reordering the information from the Balance Sheet and Income Statement.
To be able to perform all of these statements mentioned previously accountants use a set of ratios and
calculations that are not clearly stated in the reports. One of them is the Debt-to-Equity Ratio. It is a way
measure what proportion of equity and debt the company is using to finance its assets by dividing the total
liabilities by the shareholders equity. Another ratio used is the Working Capital that is calculated by getting
the amount of current assets minus the current liabilities. Indicating whether a company has enough short-term
assets to cover for its short-term debt. In other words, its short-term financial health. If the value of this ratio is
high it can also show that excess assets are not being invested.
The main purpose of financial statements is to ensure accurate and honest accounting for businesses and
individuals for either tax, financing or investing purposes. For companies, besides helping them organize and
prepare themselves for future investments, it also shows its enterprise value. The enterprise value provides a
clearer picture of the real value of a company and in consequence it helps investors compare firms with different
capital structures. It is calculated not only by taking its market capitalization but adding also the total debt of the
company minus the total cash and cash equivalents (which pays down the debts). Using the same reasoning
there is a measurement that states a countrys economic performance the Gross National Product (GNP). It is
related to all of the final goods and services produced in a one-year period by the residents of this country.
References:
AccountingCoach. Balance Sheet. (n.d.). Retrieved September 14, 2014, from
http://www.accountingcoach.com/balance-sheet/explanation
AccountingCoach. Cash Flow Statement. (n.d.). Retrieved September 14, 2014, from
http://www.accountingcoach.com/cash-flow-statement/explanation
Investopedia. Debt/Equity Ratio. (n.d.). Retrieved September 14, 2014, from
http://www.investopedia.com/terms/d/debtequityratio.asp
Investopedia. Enterprise Value (EV). (n.d.). Retrieved September 14, 2014, from
http://www.investopedia.com/terms/e/enterprisevalue.asp
Investopedia. Financial History: The Rise Of Modern Accounting. (n.d.). Retrieved September 14, 2014, from
http://www.investopedia.com/articles/tax/08/accounting-taxes.asp
Investopedia. Financial Statements. (n.d.). Retrieved September 14, 2014, from
http://www.investopedia.com/terms/f/financial-statements.asp
Investopedia. Gross National Product (GNP). (n.d.). Retrieved September 14, 2014, from
http://www.investopedia.com/terms/g/gnp.asp
Investopedia. Income Statement. (n.d.). Retrieved September 14, 2014, from
http://www.investopedia.com/terms/i/incomestatement.asp
Investopedia. Working Capital. (n.d.). Retrieved September 14, 2014, from
http://www.investopedia.com/terms/w/workingcapital.asp
SEC.gov. Beginners' Guide to Financial Statement. (n.d.). Retrieved September 13, 2014, from
http://www.sec.gov/investor/pubs/begfinstmtguide.htm
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