Financial Satements

The firm’s financial statements:

In the U.S. all public Corporations must prepare financial statements according to

GAAP (Generally Accepted Accounting Principles)

Why: So that investors can compare one company to another intelligently

-- Why you must be familiar with financial statements: because you examine

them to assess the status of a company

So, to begin: The Company’s Financial Statements :

The balance sheet (See balance sheet for MicroDrive Corporation on pg 53)

The balance sheet describes the company's status as of a particular time

Note it must always balance (all assets are claimed by someone)

Assets = Liabilities + Equity

Note that the firm can add to accounts equally on both sides, or can "trade" among accounts on one side or the other as long as both sides end up being equal

--- example: If MicroDrive sold another $1 million worth of preferred stock, the cash account would increase by $1 million and the Preferred Stock account would increase by $1 million. The Balance sheet would still be in balance

--- example: MicroDrive could issue $174 million worth of common stock and use the proceeds to pay off the $174 million in bonds outstanding. No changes would occur on the asset side of the balance sheet. The balance sheet is still in balance.

The income statement: (see income statement for MicroDrive Corporation, pg 57)

The income statement describes a company's profit and loss during a particular period

that is, it shows how much revenue came into the business vs how much in

expenses left the business during the period in question

NOTE: The income statement doesn't show funds expended to buy assets or to pay off debts. Those aren't expenses. Expenses are normally things the business obtains that can't be stored, like labor, utility service, etc.

The Statement of Cash Flows (See MicroDrive's Statement of Cash Flows, pg 62)

The statement of...