From the course: Finance Foundations

Overview of financial statements

From the course: Finance Foundations

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Overview of financial statements

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Remember that finance is about identifying necessary resources, figuring out how to get the money to buy those resources, and then managing those resources efficiently once you have them. To identify and determine and manage, you need information. That's where the financial statements come in. So we need to talk about accounting for just a minute. Now, don't be afraid of accounting. It's fun. And we will only be talking about it for a few minutes. So what is accounting? Accounting is quantitative information, accounting is numbers about money. So it's financial. And accounting is meant to be practical, useful. Accounting is not meant to be just a theoretical exercise. Although accounting theory is great, accounting is designed to be useful in making decisions. We use accounting information from the past to make decisions in the present to change the future. That's accounting. Here is what we're going to discuss as we introduce accounting. First, we will discuss the financial statements; the balance sheet, the income statement, and the statement of cash flows. These financial statements provide the raw material to be used in making finance decisions. We will look at some basic financial ratios, which are really nothing more than taking one accounting number and dividing it by another. We will be amazed at how much information we can get just by dividing one number by another. And finally, we will get some practice in financial statement forecasting using this year's financial statements to help us forecast the impact of our decisions on next year's financials. This is a powerful use of financial statements. So there are three financial statements; the balance sheet, the income statement, and the statement of cash flows. Briefly, the balance sheet is a report as of a point in time. The balance sheet reports the stuff that you have, your assets, and your obligations, your liabilities. As of a point in time, such as at the end of the year, a balance sheet is a listing of your assets and your liabilities. An income statement reports how much money you've made for a period of time, such as a month, a quarter, or a year. That's an income statement. And finally, there's the statement of cash flows, which is a report of where your cash came from and how you spend it during a period of time, such as a month, a quarter, or a year. Those are the three financial statements; the balance sheet, the income statement, and the statement of cash flows.

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