Accountants supply information to people both inside and outside the firm by issuing formal reports that are called financial statements. The financial statements are usually issued at least once a year. In many cases they are issued quarterly or more often where necessary. A set of rules, called Generally Accepted Accounting Principles, govern the preparation of the financial statements.
Generally Accepted Accounting Principles (GAAP) has been defined as a set of objectives, conventions, and principles to govern the preparation and presentation of financial statements.
These rules can be found in volumes of documents issued by the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB), the Internal Revenue Service (IRS), the Securities and Exchange Commission (SEC), and other regulatory bodies. In chapter 2 we look at some of the overriding principles of accounting as they apply to all businesses and individuals.
Basic Financial Statements
The basic financial statements include the Balance Sheet, the Income Statement, the Statement of Cash Flows, and the Statement of Retained Earnings. We will look at these in depth in the following chapters and see how they all interact with each other. As we discuss these financial statements, you will see they are not as scary as you might have thought they would be. Many of the concepts will already be familiar to you.
In the appendix, you can see examples of these financial statements from Station Casinos, Inc., a publicly traded company which operates several casinos and hotels in the Las Vegas, Nevada, area.
The Balance Sheet is the statement that presents the Assets of the company (those items owned by the company) and the Liabilities (those items owed to others by the company).
The Income Statement shows all of the Revenues of the company less the Expenses, to arrive at the “bottom line,” the Net Income.
The Statement of Cash Flows shows how much cash we started the period with, what additions and subtractions were made during the period, and how much cash we have left over at the end of the period.
The Statement of Retained Earnings shows how the balance in Retained Earnings has changed during the period of time (year, quarter, month) for which the financial statements are being prepared.
Normally there are only two types of events that will cause the beginning balance to change:
1) the company makes a profit, which causes an increase in Retained Earnings (or the company suffers a loss, which would cause a decrease) and
2) the owners of the company withdraw money, which causes the beginning balance to decrease (or invest more money, which will cause it to increase).
Seeing the Bigger Picture: None of these financial statements alone can tell the whole story about a company. We need to know how to read, understand, and analyze these statements as a package in order to make any kind of decisions about the company. In addition to the financial statements, you must understand the industry you are operating in and the general economy.
Financial statements vary in form depending upon the type of business they are used in. In general there are three forms of business operating in the United States proprietorships, partnerships, and corporations.