Financial Statement Differentiation

Financial Statement Differentiation

ACC 561

February 20, 2012

Financial Statements

Accounting has four different types of financial statements which provide important insights into the firm. These financial statements not only help to structure thinking about business decisions but also help to make right decision by providing valuable information. Common size financial statements show percentage breakdowns of the income statement and balance sheet that allow easier comparison across companies. (Kimmel,2009, p.70).

Balance Sheet

This financial statement summarizes assets, liabilities and shareholder’s equity of any firm at a specific point in time. These segments provide a clear picture of any company, what it owns, owes, and the amount invested by the shareholders. Following formula is used for a balance sheet.

Total assets = Liabilities + Stockholder’s equity

If any firm has total assets of $990,000 and total liabilities of $600,000, then the remaining amount of share holders will be the difference of assets and liabilities. This amount per given formula will be $330,000. This is an simple formula, which is used to calculate all assets of one company by summing up the liabilities and stockholder’s equity. This gives a quick financial picture of a firm.

Income Statement

The income statement reports the revenues, expenses, and profit (or loss) for a firm over a specific interval of time, typically a year o a quarter of a year. Net income is the difference between total revenue and total cost during the period. (Kimmel,2009, p.47). Let’s take an example of a gas station, which has fixed and variable expenses and if revenue of all sources exceeds expenses, gas station business will be profitable. On the other hand any firm will incur losses if expenses are greater than revenue.

Net Income = Revenue – Expenses

Statement of Cash Flows

This statement of cash flows indicates how cash position of the firm has changed during the...