Balance Sheet The balance sheet tells you whether the company can pay its bills on time, its financial flexibility to acquire capital and its ability to distribute cash in the form of dividends to the company's owners.
The top of the balance sheet has three items: (1) the legal name of the entity; (2) the title (i.e., balance sheet or statement of financial position); and (3) the date of the statement. Importantly, the financial position presented is always for the entity itself, not its owners. And the balance sheet is always for a specific point in time: instead of just a date of, say, December 31, 20XX, it would be more accurate to write December 31, 20XX, 11:59:59, or any particular moment on the 31st.
- Assets are items that provide probable future economic benefits
- Liabilities are obligations of the firm that will be settled by using assets
- Equity (variously called stockholders equity, shareowners equity or owners equity) is the residual interest that remains after you subtract liabilities from assets
ACCOUNTING EQ:
Assets = Liabilities + Owners Equity,
Assets are broken down into current and noncurrent (or long-term). Assets are listed from top to bottom in order of decreasing liquidity, i.e., how fast they can be converted to cash. (For more on this see, Reading The Balance Sheet.)
Current assets are cash and other assets that are expected to be used during the normal operating cycle of the business, usually one year. They typically include cash and cash equivalents, short-term investments, accounts receivables, inventory and prepaid expense. Noncurrent assets will not be realized in full within one year. They typically include long-term investments: property, plant and equipment; intangible assets and other assets.
Liabilities are listed in order of expected payment. Obligations expected to be satisfied within one year are current liabilities. They include accounts payable, trade notes payable, advances and deposits, current portion of long-term debt and accrued expenses. Noncurrent liabilities include bonds payable and other forms of long-term capital.
Income StatementThe income statement (also known as the profit and loss statement or P&L) tells you both the earnings and profitability of a business. The P&L is always for a specific period of time, such as a month, a quarter or a year. Because a company's operations are ongoing, from a business perspective these cut-offs are arbitrary, and they result in many of the problems in income measurement. Nevertheless, periodic income statements are essential, because they allow users to compare results for the company over time and to the results of other firms for the same period. Depending on the industry, year over year comparisons that eliminate seasonal variables may be especially useful
Income from continuing operations is the heart of the P&L. It includes sales (or revenue), cost of goods sold, operating expenses, gains and losses, other revenue and expense items that are unusual or infrequent but not both, and income tax expense.
This section of the income statement is used to compute the key profitability ratios of gross margin, operating margin, and pretax margin that help readers assess the ability of the company to generate income from its activities. Results from continuing operations are of primary interest because they are ongoing and can be predictive of future earnings; investors put less weight on discontinued operations (which are about the past) and extraordinary items (unusual and infrequent, thus unlikely to reoccur). Companies thus have an incentive to push negative items that belong in continuing operations into other categories.
Current assets are cash and other assets that are expected to be used during the normal operating cycle of the business, usually one year. They typically include cash and cash equivalents, short-term investments, accounts receivables, inventory and prepaid expense. Noncurrent assets will not be realized in full within one year. They typically include long-term investments: property, plant and equipment; intangible assets and other assets.
Liabilities are listed in order of expected payment. Obligations expected to be satisfied within one year are current liabilities. They include accounts payable, trade notes payable, advances and deposits, current portion of long-term debt and accrued expenses. Noncurrent liabilities include bonds payable and other forms of long-term capital.
Income StatementThe income statement (also known as the profit and loss statement or P&L) tells you both the earnings and profitability of a business. The P&L is always for a specific period of time, such as a month, a quarter or a year. Because a company's operations are ongoing, from a business perspective these cut-offs are arbitrary, and they result in many of the problems in income measurement. Nevertheless, periodic income statements are essential, because they allow users to compare results for the company over time and to the results of other firms for the same period. Depending on the industry, year over year comparisons that eliminate seasonal variables may be especially useful
- Income from continuing operations
- Results from discontinued operations (if any)
- Extraordinary items (if any)
- Cumulative effect of a change in accounting principle (if any)
- Net income
- Other comprehensive income
- Earnings per share information
Income from continuing operations is the heart of the P&L. It includes sales (or revenue), cost of goods sold, operating expenses, gains and losses, other revenue and expense items that are unusual or infrequent but not both, and income tax expense.
This section of the income statement is used to compute the key profitability ratios of gross margin, operating margin, and pretax margin that help readers assess the ability of the company to generate income from its activities. Results from continuing operations are of primary interest because they are ongoing and can be predictive of future earnings; investors put less weight on discontinued operations (which are about the past) and extraordinary items (unusual and infrequent, thus unlikely to reoccur). Companies thus have an incentive to push negative items that belong in continuing operations into other categories.
Statement of Changes in Owners EquityA separate Statement of Changes in Stockholders' (or Owners) Equity is also prepared that reconciles the various components of OE on the balance sheet for the start of the period with the same items at the end of the period.
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