Financial Statements

After a few months, the transactions recorded by a bookkeeper will

accumulate, making it difficult for management to sort out what is go-

ing on. To simplify the picture, accountants prepare financial statements

that summarize the transactions. Three of the most important are the

balance sheet, the income statement, and the statement of cash flow.

The Balance Sheet. A balance sheet, also known as a statement of

financial position, is a kind of “snapshot” of where a company is, finan-

cially speaking, at one moment in time. It includes all the elements in

the accounting equation, showing the balance between assets on the one

hand and liabilities and owner’s equity on the other. Figure 1 is a balance

sheet for Sweet Dreams Ice Cream, Inc., a small corporation that makes

ice cream and sells it through its own shop.

But no business can stand still while its financial condition is being

examined. A business may make hundreds of transactions of various

kinds every working day. Even during a holiday, office fixtures grow older

and decrease in value, and interest on savings accounts accumulates. Yet

the accountant must set up a balance sheet so that managers and other

interested parties can evaluate the business’s financial position as if it

were static.

Accordingly, every company prepares a balance sheet at least once a

year, most often at the end of the calendar year, covering from January

1 to December 31. However, many business and government bodies use

a fiscal year, which may be any 12 consecutive months. For example,

a business may choose a fiscal year that runs from June 1 to May 31

because its peak selling season ends in May. Some companies prepare a

balance sheet more often than once a year, perhaps at the end of each

month or quarter.

The Income Statement. The income statement reflects the results of

operations over a period of time, typically one year. If the balance sheet

is a “snapshot,” the income statement is a “movie”. It summarizes all

revenues (or sales), the amounts that have been or are to be received

from customers for goods or services delivered to them, and all expenses,

the costs that have arisen in generating revenues. It then subtracts ex-

penses from revenues to show the actual profit or loss of a company, a

figure known as net income – profit or the “bottom line.” Figure 2 is an

income statement for Sweet Dreams Ice Cream, Inc.

Figure 1

Sweet Dreams Ice Cream, Inc.