Maintaining a healthy heart is vital to living a full life. The heart’s four chambers work in tandem to move blood throughout the body to oxygenate blood and remove toxins. When one chamber isn’t working properly, the body react accordingly.
In the same way that the heart’s valves work together, the primary elements of the financial statement work together to measure a company’s profitability and performance. Assessing these four components – the balance sheet, income statement, statement of cash flows and statement of equity – helps to improve and maintain a company’s financial health.
If one of your heart valves does not work, you will need a cardiologist. In accounting, if one part
of your financial statement is weak, you will need a Certified Public Accountant (CPA).
Typically, San Diego area business owners and lenders are the most common users of income statements. Investors, suppliers, governmental agencies and sometimes employees find these statements useful at times, too.
Owners are interested in profits. Additionally, they want to know how much money they can retain for personal income and how much capital the business spent to generate sales revenue. Lenders have an interest in both a company’s profit and cash flow, particularly if the company has borrowed money.
The Balance Sheet
The balance sheet, also called a statement of financial position, has three parts: assets, liabilities and stockholders’ equity at a specific date, which normally is the last day of the accounting period being reported
The first section of the balance sheet reports the company's assets such as cash, accounts receivable, prepaid insurance, buildings, and equipment. The balance sheet also identifies liabilities. A liability encompasses obligations that are due at the date of the balance sheet and items that are payable. Outstanding bills (accounts payable), wages, interest and notes all are classified as liabilities. Stockholders' equity is defined as the difference between the amount of assets and the amount of liabilities.
The Income Statement
Commonly called a “P&L” or profit and loss statement, the income statement reports a company's profitability during a specific period. This period might be one year, one month, three months, or any other period that company chooses.
Revenues, expenses, gains, and losses are recognized in the income statement. Sales, service revenues and interest revenue are revenue. Examples of expenses are the cost of goods sold, operating expenses (salaries, rent, utilities) and non-operating expenses (interest expense). When a corporation's stock is publicly traded, the earnings per share of its common stock are reported on the income statement.
Statement of cash flow
The statement of cash flow explains the change in a company's cash during a specific period. This timeframe is indicated in the heading of the financial statement. The change, or flow, is categorized into three different types of activities: operating, investing and financing.
Operating activities reflect how a company's cash (and cash equivalents) have changed due to operations. Investing activities refer to dollars spent or received in transactions involving long-term assets. Financing activities report a variety of actions such as cash received through the issuance of long-term debt, the issuance of stock or money spent to retire long-term liabilities.
Statement of Stockholders' Equity
The statement of stockholders’ – or shareholders’ – equity identifies the changes in stockholders’ equity for the same period as the income statement and the cash flow statement. These changes will include items such as net income, other comprehensive income, dividends, the repurchase of common stock and the exercise of stock options.
The accounting professionals at Steven Alpinieri CPA, An Accountancy Corporation, in La Jolla specialize in helping clients understand their financial picture. To learn more visit www.sandiegocpasteve.com or call the office at (858) 230-6610.