Financial Statement Q&A
Part of the Accounting For Dummies Cheat Sheet
Accounting information is presented in the form of financial statements that are packaged with other information, such as explanatory footnotes and a letter from top management, in what is called a financial report. These documents are prepared at the end of each accounting period, which may be one month, one quarter (three calendar months), or one year. Read on to learn more about what you'll find in financial statements.
Q: What's in the financial report of a business?
A: The heart and soul of a financial report are financial statements. You can read the letter from the top dog and other things in the report, but the real skinny about the business is found in its financial statements. Ignore them at your peril.
Q: Who's the target audience of financial statements?
A: Believe it or not, financial statements are for non-accountants — in particular, the lenders and investors of the business as well as its managers. These users need to know how to read financial statements, which can be a challenge.
Q: What information is reported in financial statements?
A: Oh, not much . . . the profit or loss of the business, whether its financial condition is sound or precarious, and whether its cash flow is strong or weak. Just these little financial odds and ends about the business.
Q: Where do I find the bottom-line profit or loss of a business?
A: In the last line in its income statement, which summarizes the sales revenue, income, expenses, and losses of the business for the period. Public companies also report earnings per share in their income statements. Private companies don't have to.
Q: Where do I find the summary of assets and liabilities of a business?
A: In its balance sheet, which also reports the sources of its owners' equity. The sales and expense activities of a business propel its assets and liabilities (not all, but most). The asset values reported in a balance sheet reflect past transactions, and may differ from their current replacement or market values.
Q: Where do I find the good or bad news about cash flow of a business?
A: Read the business's statement of cash flows. Cash flow generated from making profit is disclosed in the first section of this financial statement. A business could report a decent profit but still have cash flow problems.
Q: Are standard financial statements adequate for managing a business?
A: No, not by a long shot. Managers need additional information for doing their job. Financial statements are a good starting point — but more detailed information is needed, which is confidential and not circulated outside the business. Accountants who don't understand this should be fired on the spot.