Accountants keep track of the transactions for a business and load each of the transactions in a ledger. At the end of a time period, usually at the end of each month, the accountant or bookkeeper pulls the data out of the ledger and prepares financial statements.
There are three main financial statements that are required for public companies.
1. Income Statement
2. Balance Sheet
3. Statement of Changes in Cash
Each of these statements deserves their own page, and multiple pages, but this chapter will describe them briefly and highlight key differences.
The income statement shows the revenues the company generates and expenses it incurs, and then compares the two to show how much money the company made or lost. The income statement covers a time period, usually a month, quarter (three month period) or year.
The balance sheet shows the financial position of a company at a point in time. It does not cover a month, but instead shows the company’s assets and liabilities at a specific date, usually the end of a month, quarter or year.
Statement of Changes in Cash
This statement, like the income statement, covers the company activities over a time period. Unlike the income statement, this statement covers all transactions that impact the company’s cash position.
Investments in fixed assets, also known as capital expenditures, are shown here, since they are uses of cash, but they are not shown on the income statement until they are depreciated.
Using Financial Statements
These statements are all related, and when viewed together, provide important facts about a company to management and outside investors.