Financial Statement Essay

Financial Statements: A Portrait of Organizational Health
Conducting business is all about making decisions. Firms need to decide whether to reinvest their profits or pay dividends. Lenders need to decide whether or not to loan money to a particular firm and what interest rate is appropriate to covers the risk associated with lending. Investors need to determine which stocks will provide the greatest return for the least amount of risk. For all the decisions listed thus far (and many more that were not mentioned), interested parties use the financial statements of a firm to aid in making these decisions. In this paper, we 'll look at the three major components of financial statements - the income statement, the balance sheet, and the
The income statement is provides a summary of expenses and revenues. The income statement is probably the simplest of all the financial statements and is perhaps one of the most important as it shows, at a glance, the profits and loses accrued during the reporting period. As firms are in the business of profit, it 's clear why the income statement is an important tool that stakeholders can use to evaluate a company 's health. Some of the major expenses listed on the income statement are cost of goods sold (COGS), depreciation, general & administrative (G&A), interest, and income taxes. COGS are costs directly associated with generating revenues, like raw materials, overhead, and labor. While COGS will vary with the level of output produced, G&A expenses are often fixed and include costs like salaries and fees. Depreciation is considered a non-cash expense that estimates the "reduction in the economic value of the firm 's plant and equipment" (Melicher & Norton, 2014, p. 358). The depreciation denoted on the income statement is only the estimate of depreciation for the period. The accumulated depreciation is captured on the balance
It 's called the balance sheet because liabilities and assets have to balance each other out. Put simply, liabilities plus owners equity must equal assets. There are a few categories of assets used on the balance sheet. Current assets are those that are considered most liquid and consist of "cash and marketable securities, accounts receivable, and inventories" (Melicher & Norton, 2014, p. 360). Fixed assets are property, plant, and equipment (PP&E) that is owned by the company. The value of fixed assets is recorded on the balance sheet as the original cost of the asset minus any depreciation. Intangible assets includes all other components of a firm 's value that is not captured by current and fixed assets like "patents, copyrights, trademarks, franchises, and goodwill" (Investopedia, 2015). Equity is generally lumped into three categories for corporate balance sheets: preferred equity, common stock, and retained earnings. The final major component of a firm 's financial statement is the statement of cash flows. As the name would suggest, the statement of cash flows summarizes the flow of cash into and out of a company during a specific period. Cash flows are segregated into three activities: operating, investing, and financing. Cash flow from operating activities include inflows like revenue and interest as well as outflows like payments