Financial Statements

Many have heard of the perpetual line from the movie Jerry Maguire, “Show me the money!” That is what financial statements do; they show you the money. These decisive reports detail where a business’s money comes from, where their funds are going, and where they are now. There are four basic financial statements; Balance Sheets, Income Statements, Cash Flow Statements and Statements of Shareholders’ Equity. These financial reports are interconnected and beneficial to internal and external users who have interest in the information. If a person can read a recipe, he or she can grasp an understanding of the purpose of accounting and learn how to read the four main financial statements.

The main purpose of accounting is to prepare financial reports that provide information with reference to an organizations performance to external parties; such as investors and creditors. The rationale behind financial tracking is to provide a means of sound economic decision making; identifying, recording, and reporting. Internal parties, like managers and employees, benefit from the usefulness of reporting, recording, summarizing, and interpreting data. “Managerial accounting contrasts with financial accounting in that managerial accounting is for internal decision making and does not have to follow any rules…” (QuickMBA). Alternatively, financial accounting is performed according to Generally Accepted Accounting Principles (GAAP) guidelines.

Balance Sheets detail what an organization owns and what it owes during a specific period in time. Assets are things of material value; such as property, equipment and inventory. Liabilities are monies owed; such as loans, rent, payroll, and taxes. They also include environmental cleanup costs and the responsibility to provide products or services onward. Capital and net worth otherwise known as shareholders’ equity; it is the profits remaining after a company sells its assets and eliminates its liabilities. The profits belong to the shareholders’ or the business owners. The idea behind balance sheets is to show an overview of a company’s assets, liabilities, and shareholders’ equity.

Income Statements are a summary of an organizations profits and losses (P&Ls) during a particular time frame. They specify how much money an organization made