Financial Statements Overview

Study Notes

Financial statements are written records that convey the business activities and financial performance of a company.
Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes.
There are four main financial statements that a company must produce and broadcast regularly (yearly):
- Balance Sheet
- Income Statement
- Statement of Cash Flows
- Statement of Stockholders’ Equity

The balance sheet details the assets, liabilities, and owner equity of a company.
Assets are the resources a company owns.
Liabilities are the debts a company owes.
Owner Equity represents the rights of the owner (also called net assets).
The balance sheet provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.

Assets are presented on the balance sheet in decreasing order of liquidity.
Liquidity refers to how quickly an asset can be converted into cash.
Current Assets are assets that can be converted into cash within a year. Examples include cash, marketable securities, and accounts receivable.
Investments are assets held for longer-term growth, such as stocks and bonds.
Property, Plant, and Equipment (PP&E) are long-term assets used to produce goods or services. Examples include buildings, land, and machinery.
Intangible Assets are assets that have no physical form, such as patents, trademarks, and goodwill.
Other Assets are assets that don't fit into the previous categories, such as bond issue costs.

The balance sheet adheres to the following accounting equation:
- Assets = Liabilities + Shareholders' Equity
This equation means that the total value of a company's assets must equal the total value of its liabilities plus the amount contributed by its shareholders.

Liabilities represent the debts owed by a company.
Liabilities are ordered on the balance sheet by maturity, with current liabilities (due within a year) listed first, followed by long-term liabilities (due in over a year).
Accounts Payable is a common liability that represents short-term debts owed to suppliers for goods or services.
Bonds Payable is a long-term liability that represents debt issued to investors.
Off-balance Sheet (OBS) Items are assets or liabilities not included on a company's balance sheet. These items are typically not directly owned by the company or are not a direct obligation of the company. Examples include securitized loans and operating leases.

Stockholders’ equity represents the ownership stake in a company by its investors.
Preferred Stock is a type of share that often has no voting rights but is guaranteed a cumulative dividend.
Common Stock represents the owners' or shareholders' investment in the business as a capital contribution.
The value of common stock is equal to the par value of the shares times the number of shares outstanding.