Understanding Financial Statements

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Income Statement
An income statement is a type of summary flow report that lists and categorizes the various revenues and expenses that result from business operations during a given period — a year, a quarter or a month. The difference between revenues and expenses represents a company’s net income or net loss. Income statements are important to business owners because they represent the bottom line.

Statement of equity
The statement of equity shows changes in owners’ capital accounts over time. If you’re a business owner, your equity account represents how much of your company you own. At the close of the accounting cycle, any net income becomes yours. Whether you reinvest it in the business, use some of the profit as personal income or withdraw all of it, the owner’s statement of capital will reflect any changes to the capital account.

Statements of equity typically are prepared after the income statement. Before accountants can make adjustments to an owner’s capital account, they need to know whether a company has a net income or net loss.

Balance Sheet
The balance sheet is based on this equation: assets = liabilities + owners’ equity. It lists everything your company owns (assets), everything your company owes to creditors (liabilities) and the value of your ownership stake in your company (owners’ equity, or capital).
Unlike the income statement and statement of capital, which show changes in a business’s financial condition over time, the balance sheet — also referred to as a statement of financial condition — provides a snapshot of a company’s financial position at a specific point in time.

Cash-Flow Statement
The cash-flow statement shows all sources and uses of a company’s money during the accounting period. Sources of cash listed on the statement include revenues, long-term financing, sales of non-current assets, an increase in any current liability account or a decrease in any current asset account. Uses of cash include operating losses, debt repayment, equipment purchases and increases in any current asset account.
Because it shows whether a business’s cash flow is increasing or decreasing, a cash-flow statement is useful for warding off cash-flow problems.


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