Financial statements are reports prepared by a company’s internal management that reports the financial performance of the company. Furthermore, the balance sheet and the income statement are amongst the most imperative and popular financial statements. These statements are prepared to give users outside of a company such as investors and creditors an insight towards the financial position of the company. Moreover, financial statements are the main source of information that the management, investors and creditors use for their decision making, thus, there is a heavy emphasis on the accuracy, reliability, and relevance of the information on these financial statements.
The balance sheet provides an overview of a company’s assets, liabilities, and stockholder’s equity on a specific date at a certain point in time. On a balance sheet that are three main categories, assets, liabilities and shareholders equity. Firstly, assets are listed in the order of liquidity, short term more liquid assets will be stated first such as cash and accounts receivable. Secondly, there are the liabilitie’s accounts which are listed in the order in which they must be paid; these accounts are listed in the order in which they are due, such as accounts payable are generally to be paid within the accounting cycle, therefore, will be listed earlier. Lastly, there is the shareholder’s equity which is a company’s total assets minus total liabilities. Furthermore, shareholders equity is the amount of money that would be returned to the investors, if all assets were liquidated and the company's debts were paid off.
The income statement shows the revenue and expenses,net income and earnings per share of a company over time, which can be issued in either annual or quarterly financial statements. Furthermore, there are different types of revenues reported on an income statement, such as operating revenue, which is the revenue earned by selling a company products or services. Other types of incomes are generated from non core business activities. For example, interest earned on cash in the bank and rental income. Subsequently, primary expenses are incurred in the process of generating income as cost of goods sold, research and developments costs, salary expense, depreciation and amortization expense. Lastly, net income or net loss can be easily calculated by subtracting the income or revenue by all the expenses.
