Agree or Disagree? And Why?

Businesses, whether big or small recognize the importance of keeping financial information organized. This includes understanding how money is being utilized and determining weaknesses within the firm. Being able to interpret information about a company requires an understanding of financial statements in order to asses performance and to help plan future actions. To do this a company relies on the four basic types of financial statements use to help determine the overall health of a company are income statements, balance sheets, statements of cash flow and statements of owner equity. This statements are the most important source of information for evaluating the financial health of a company.

Theincome statementshows the net income or net loss of the company. All the money coming in or out is tracked by this particular type of statement. Any transaction that is paid out is an expense while any money coming in is referred to as revenue. When expenses exceed revenue it is shown as a net loss. The income statement is broken down into three main categories; sales, operating expenses, and non-operation expenses. Advertising and or rent paid for a particular location are considered operating expenses while non-operating expenses include anything from interest on borrowed money to one-time purchases. Sales are the sum total of all goods sold.

Thebalance sheetis a financial snapshot of a company taken at any given point in time. The balance sheet contains assets, liabilities, and owner's or shareholders equity. Assets include cash, property, inventory, and anything else that is owned by the company. Liabilities include accounts payable or any type of payment that is made on a long-term loan by the company. The owner's equity is determined by subtracting liabilities from assets. The formula Assets = Liabilities + Shareholder's Equity is used to determine the liquidity of the company.

Thestatement of cash flowis essentially used to determine where all the money went. For larger companies there are four categories, which are, operating activities, investing activities, financing activities, and other supplemental information. Smaller companies only two categories are relevant, cash inflows and cash outflows. This statement enables a company to see if they are spending more than they earn.

Thestatement of owner's equitylists changes in the owner's equity between accounting periods. The key categories listed on this statement are beginning equity balance, additions and subtractions, and the ending balance. This statement includes the sale or repurchase of shares, dividend payments, and any changes caused by reported profits or losses.