Financial statements are the accepted presentation of an entity’s financial condition. The accountant acknowledges, to degrees varying based upon the level of evaluation they are asked to apply, the reasonableness of those numbers and disclosures. With some patience, most anyone can glean important information and knowledge from the financial statements. The components:
Independent Auditors’ or Other Accountants’ Report
Balance Sheet – what they have and owe on the date of the Financial statements
Income Statement – results of profit and loss operations for the year
Statement of Equity – details on the owners’ equity and accumulation profit and loss results less distributions to owners
Statement of Cash Flows – reconciles income statement, which is on the accrual basis, to cash coming in and going out of the organization (recording revenue when entitled to it and expenses when incurred, neither reflected when they are paid)
Notes to Financial statements – important disclosures that Financial Statement users need to know
Following postings will address each component.
Not-for-profit note:
For these entities, Owners’ Equity is quite meaningless. Also, distributions don’t occur. Cash flow rules!