Question

Provide, in your own words, an overview of the four financial statements listed in the text: the Income Statement (also called the P&L), the Balance Sheet, the Statement of Cash Flows, and the Statement of Stockholder's Equity. What information is contained in each, and what judgments can you make about a company from each of the statements?

Answer 1

Four financial satements are:

Income statement: Income statement is prepared first before any of the other financial statement is prepared. It shows the net income earned over a specified period of time. All the revenues and expenses are recorded in the income statement and then net income is calculated. It also shows te gross, operating or net margins for the company.It is prepared for a specified period of time.

Balance sheet: A balance sheet is prepared to know the financial position of a company as on particular date. It shows what the company owns (resources) and what it owes (sources). All items in the balance sheet are categorized into assets, liabilities and equity. Balance sheet is prepared on the basis of accounting equation as below:

Assets = Liabilities + Stockholder's equity

A balance sheet always balances.

Statement of cash flows: A statement of cash flows is prepared to know the sources and uses of cash. All the cash receipts and cash payments are divided into operating, investing and financing activities. At the end of this statement, ending balance of cash is arrived at.

Statement of stockholder's equity: Statement of stockholder's equity is prepared to know the ending balance of equity. All the equity transactions are recorded and analyzed in this statement.It starts with the beginning balance of equity then, net income is added and dividends paid are deducted from it. Similarly, all the other equity transactions are adjusted in this statement to arrive at the ending balance of equity.