Financial Statements

There are four kinds of financial statements. The first is the Income Statement. It is an accounting of sales, expenses, and net profit for a given period - usually one year. It simply lists all sources of income, then subtracts all expenses. If the final value is positive, then that is the amount of profits; with a negative value, the company is losing money. The first item in an Income Statement is the total Sales (revenue). This includes cash and credit received for all goods and services sold by the company. The next item is the Cost of Goods Sold (COGS), which includes items such as raw materials, labor, and overhead expenses. Since COGS is an expense, it is subtracted from Sales. The difference is called the Gross Profit or the Gross Margin. A higher Gross Profit is preferable for a company, and this can be attained by minimizing COGS. The next item in an Income Statement would be Operating Expenses, or the things paid for in order for the company to conduct business. These include expenses such as salaries, rent, and utilities. Again, since this category is an expense, it is subtracted from Sales; the difference is the Operating Income. This income is subject to taxes. Having subtracted the taxes gives us the Net Income. The limitation of the Income Statement is that it describes on a transaction basis instead of giving a bigger picture of events. Non-measurable items are not accounted for, such as changes in value of real estate.

Another financial statement is the Balance Sheet. It has two parts which should be equal (balanced) in value. The first part are the Assets and the second part are Liabilities and Equity combined. Both parts should be equal because each item of a company's assets can only be one of two things: it is either owed to somebody (liability), or it is claimed by a stockholder (owner's equity). Assets are either Current or Fixed. Current Assets include cash, marketable securities (stocks and bonds that can be easily sold), accounts receivable, and inventory - listed according to ease of being converted to cash (liquidity). Fixed or Long Term Assets include land, buildings, and equipment. Since equipment usually have a limited lifespan (depreciation), its value is oftentimes distributed throughout the duration of its predicted usability. Using a fraction of its value from year to year instead of its entire value brings down the Assets, and therefore also lessens the taxes to be paid. Liabilities are monies owed by the company to people of entities other than the investors. Current liabilities are short-term liabilities, payable within one year; examples are day-to-day expenses and taxes.