Understanding the Big Three Financial Statements

Finance Quizlet – Chapter 6 – The Big Three Financial Statements

1. What is a Financial Statement?

Financial statements are documents that provide users with insight into a company’s assets, liabilities and equity at a specific point in time. The big three financial documents are the balance sheet, income statement and cash flow statement.

The balance sheet shows a company’s assets, including cash, marketable securities and inventory. It also lists the company’s liabilities, which include debt and accounts payable.

Revenue is a top line figure that includes all income earned through business activities, such as sales of products and services. It is subtracted from expenses to determine a net income figure.

Accounts payable are bills that must be paid during the course of operations, such as utility bills and obligations to purchase raw materials. Other asset items may include investments held for speculative growth, such as property, plant and equipment, or intangibles like trademarks, patents and goodwill.

2. What is a Balance Sheet?

A balance sheet provides a snapshot of a company’s financial condition. It shows the total assets, liabilities and owners’ equity of a business as of a given date. The information in a balance sheet is organized according to the simple formula: Assets = Liabilities + Owners’ Equity. The assets section reports the company’s physical property (e.g., plants, trucks, equipment and inventory) as well as intangible assets such as patents and trademarks. The liabilities section includes current accounts payable, notes payable due within the year and a summary of other long-term debt.

The owners’ equity section combines the company’s paid-in capital with its accumulated other comprehensive income. A company’s balance sheet is used to determine its net worth and creditworthiness, among other things.

3. What is a Cash Flow Statement?

A cash flow statement is a report that shows the amount of money flowing into and out of a company during a certain period. It consists of three sections: operating, investing, and financing activities.

The operating activities section includes day-to-day business management activities, such as buying materials and supplies, managing payroll, and collecting customer payments. This section also includes non-cash items, like depreciation and amortization.

The investing activities section reflects the purchase and sale of long-term assets, such as equipment and real estate. This section also includes non-cash expenses, such as inventory adjustments and prepaid expense. The financing activities section reflects the money a company receives from investors and banks, as well as dividend payments and stock buybacks. This section also includes debt repayments and interest payments.

4. What is a Profit & Loss Statement?

The profit and loss statement is one of the primary financial documents a company produces. Also known as an income statement, P&L statements detail the revenue and expenses of a business over a period of time to show if you’re making money or not.

The top line of the P&L is revenue, which includes sales or service fees. The bottom line is net income, which is calculated as total revenues minus cost of goods sold, operating expenses, and taxes.

The P&L statement is one of three primary financial documents that a company prepares along with the balance sheet and cash flow statement. Interested parties, including banks and investors, want to see your P&L history when applying for financing or looking to purchase your company.

5. What is a Balance Sheet?

A balance sheet is a snapshot of your practice’s financial standing at a moment in time. It lists assets on the left, liabilities on the right and shareholder equity in between. Like the other financial statements, the balance sheet adheres to the accounting equation: Assets equal liabilities plus shareholder equity.

Assets are the things your business owns that hold inherent monetary value, such as cash and inventory. They are often categorized as current and noncurrent, with the latter being longer-term investments such as property and equipment. Just like your car, these long-term assets decrease in value over time through an expense account known as depreciation. The depreciation is reflected in the assets section of your balance sheet. Liabilities and owner’s equity are a function of your debt and investment from shareholders.

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