The Financial Statements
Accounting tries to answer the following questions using formalized rules -
- What do you own?
- What do you owe?
- How much money did you make?
and these questions are answered by these primary tools:
- Balance sheet: What company owns, owes to and the equity is worth.
- Income statement: Revenues and expenses over a periood of time.
- Statement of cash flows: Cash in and cash out from operations, investing, financing and operations.
A sample balance sheet looks like this -
| Assets | Description |
|---|---|
| Long lived (physical assets) | Fixed assets |
| Short lived | Current assets |
| Investments (in securities and other business) | Financial assets |
| Non-physical | Intangible assets |
| Liabilities | Description |
|---|---|
| Long term debt | Debt |
| Other long term liabilities | Other liabilities |
| Short term obligations | Current liabilities |
| Shareholders’ equity | Equity |
Note that all three i.e balance sheet, income statement and cash flows statement are interconnected. We need to read all three of them together.
There are concepts such as “standardisation” to allow comparision among different companies and “first principles” to ensure that asset value and cash flow measure measure what they are supposed to measure. Accounting standards are set like GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standard).