Understanding Basic Financial Statements

Chinyere Monye Written by Chinyere Monye · 1 min read >

Companies report their financial activities under generally accepted accounting principles (GAAP). Using four basic financial statements

  1. The balance sheet presents in summary form, as of a specific date, the assets owned by the company, the liabilities owed by the company to its suppliers and to lenders who have provided funds for the business and the accumulated funds the owners of the enterprise have invested and left with  the to cover its operating needs
  2. The income statements summarizes those transactions that produced revenues for the business as a result of selling its products (or its services) during a period and those transactions that resulted in expenses for the business.
  3. The statement of owners equity summarizes the major transactions during a specific period that affected the owner’s interest in the company including the net income the enterprise earned and the amount of those earnings that the owners elected to distribute to themselves
  4. The statement of cash flows summarizes the sources of the company’s cash funds during the period and the uses the company made of those funds

Due from customers often referred to as accounts receivable or trade receivables represents the amount owed to the company by customers who purchased merchandise but who had not, as of Dec31 paid for those purchases .A large portion of all commercial sales are credit sales where the buyer agrees to pay for the purchases within 30,60, or 90days.Under GAAP using accrual accounting ,the accounts receivable due from customers are recognized as assets

Account receivable are recorded at the amount of cash the company expects to receive as a result of those charges sales. It is adjusted down by what they do not expect to collect.

Inventory is the aggregate cost of the raw materials work-in-process and finished goods owned by the company

Long –term debt is the outstanding principle of the amount borrowed from a financial institution to provide funds for the operations.

The Income Statement

The balance sheet presents a company’s assets, liabilities, and owners’ equity at a particular point in time. In contrast the Income Statement presents the result of a flow of transactions (the income –generating transaction) over a period of time. The Income statement shows the revenues earned and expenses incurred by the company during a period of operations.

Accounting is a language, a communications device and therefore is not an end in itself.

Thus accounting reports are not the end of the measurement and evaluation process.

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