Accounting Basis

Introduction

Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. Financial statements include:

• Balance sheet
• Income statement
• Cash flow statement.

Financial Statement

• Financial statements are written records that convey the business activities and the financial performance of a company.
• The balance sheet provides an overview of assets, liabilities, and stockholders’ equity as a snapshot in time.
• The income statement primarily focuses on a company’s revenues and expenses during a particular period. Once expenses are subtracted from revenues, the statement produces a company’s profit figure called net income.
• The cash flow statement (CFS) measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments.

Using Financial Statement Information

Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions direction of the company’s stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm’s financial statements.

Balance Sheet

Understanding Balance Sheets

The balance sheet provides an overview of a company’s assets, liabilities, and stockholders’ equity as a snapshot in time. The date at the top of the balance sheet tells you when the snapshot was taken, which is generally the end of the fiscal year.

The Balance Sheet FormulAssets=(Liabilities+Owner’s Equity)

The balance sheet totals will be calculated already, but here’s how you identify them.

Locate total assets on the balance sheet for the period.

Total all liabilities, which should be a separate listing on the balance sheet. It may not include contingent liabilities.

Locate total shareholder’s equity and add the number to total liabilities.

Total assets should equal the total liabilities and total equity.

Data From the Balance Sheet

The balance sheet identifies how assets are funded, either with liabilities, such as debt, or stockholders’ equity, such as retained earnings and additional paid-in capital. Assets are listed on the balance sheet in order of liquidity.

Liabilities are listed in the order in which they will be paid. Short-term or current liabilities are expected to be paid within the year, while long-term or non-current liabilities are debts expected to be paid in over one year.

Items Included in the Balance Sheet

Below are examples of items listed on the balance sheet.

Assets

Cash and cash equivalents are liquid assets, which may include Treasury bills and certificates of deposit.

Accounts receivables are the amount of money owed to the company by its customers for the sale of its product and service.