From the course: Accounting Foundations

Summary of financial reporting

From the course: Accounting Foundations

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Summary of financial reporting

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- The focus of financial accounting is to communicate to people outside the company. The primary target audience is lenders and investors who are providing money to the company to buy its assets. These financial reports can be thought of as three pieces of paper, the balance sheet, the income statement, and the statement of cash flows. It's amazing how much information can be summarized about a company on just three pieces of paper. Think about Walmart and their billions of customer visits per year. The results of all that can be summarized in boom, boom, boom, three pieces of paper. So what's on the balance sheet? Three things structured around our favorite equation. It wasn't our favorite equation before today, but now it is. The accounting equation, assets equal liabilities plus equity. If I've got assets, I had to get the money to buy those assets from somewhere. I either borrowed it, liabilities. Or it was provided to the company by shareholders, equity. Assets equal liabilities plus equity, that's the balance sheet. The income statement can be summarized as follows, revenues minus expenses equal net income. Revenues are the amount of assets generated through doing business. Expenses are the amount of assets consumed in doing business. And what we would hope in a company is that you generate more assets than you consume in your business operations. The one number that is often used to summarize the income statement is the earnings per share, or EPS. Which is the amount of net income divided by the number of ownership shares owned by the shareholders. That's the income statement. The statement of cash flows is the baby, it's only 37 years old. There are three categories of cash flows. Operating cash flows are the things that you do every day. Investing cash flows are investments in the productive capacity of the business, buying more buildings and trucks and land and so forth. Financing activities involve getting the money to buy the stuff that I need through borrowing and shareholder investment, and then repaying loans and paying dividends to shareholders. Of these three activities, operating, investing, and financing, cash flow from operating activities is the most important because that summarizes the cash results of the things we do on a daily routine basis. These three financial reports, the balance sheet, the income statement, and the statement of cash flows, summarize everything about a company's financial performance. That is financial accounting.

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