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Financial Statements

The three main financial statements are:

The balance sheet—which reports a corporation's assets, liabilities, and stockholders' equity as of a point in time (e.g., as of midnight of December 31, 2006).
The income statement—which reports a corporation's revenues and expenses for a period of time, such as a year, quarter, month, 52 weeks, 13 weeks, etc.
The statement of cash flows (or cash flow statement)—which provides information on the change in a corporation's cash and cash equivalents during the same period of time as the income statement.

The financial statements that are distributed outside of a company need to be prepared in accordance with generally accepted accounting principles (GAAP). For example, the cost principle generally requires that the balance sheet should report long-lived assets at cost minus accumulated depreciation. The matching principle requires that the cost of long-lived assets used in the business be allocated to various accounting periods in which they generate revenues or are used up. Some costs are deferred to the balance sheet as assets and are expensed in subsequent periods because of the going concern principle and the matching principle. The financial statements are to reflect these basic accounting principles as well as the detailed accounting pronouncements of the Financial Accounting Standards Board (FASB).

When a corporation's stock is publicly traded, its financial statements must be audited by independent certified public accountants. These CPAs issue an audit report stating that the financial statements have been prepared in accordance with GAAP. The financial statements of some companies whose stock is not publicly traded might also be audited for the comfort of the owners and/or lenders.

Always keep in mind that financial statements report the results of past transactions. There is no assurance that the future transactions will be similar to the past transactions.

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Sample Financial Statements Questions

1) The cost flow assumption that results in less net income when the cost of the inventory items is increasing.

2) The income statement format that reports the amount of gross profit as a line item is the _____________-step format.

3) A corporation's own stock that has been purchased by the corporation but is not retired is ___________ stock.

4) When an accountant is faced with two possible alternatives for reporting a situation, this accounting guideline directs the accountant to select the alternative that will result in less net income and less asset amount (or a greater liability amount).

5) When a long-term asset is sold for less than its book value, the difference is reported on the income statement as a ______.

6) An accounting year ending with a date other than December 31 is a _________-year company.

7) A long-term asset used in a business that does not get depreciated.

8) The cumulative earnings of a corporation minus the cumulative dividends declared by the corporation is generally the amount reported on the balance sheet as ____________ Earnings.

9) The __________ of the financial statements includes the company name and the name of the financial statement.

10) Dividends that a corporation declares and pays are reported under this activity on the statement of cash flows.