Financial Statements: Summarizing the Organizations Financial Status
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A financial statement is a summary of some aspect of an organization’s financial status. The information contained in such a statement is essential in helping managers maintain financial control over the organization.
There are two basic types of financial statements: the balance sheet and the income statement.
The Balance Sheet: Picture of Organization’s Financial Worth for a Specific Point in Time
A balance sheet summarizes an organization’s overall financial worth—that is, assets and liabilities—at a specific point in time.
Assets are the resources that an organization controls; they consist of current assets and fixed assets. Current assets are cash and other assets that are readily convertible to cash within one year’s time. Examples are inventory, sales for which payment has not been received (accounts receivable), and U.S. Treasury bills or money market mutual funds.Page 564 Fixed assets are property, buildings, equipment, and the like that have a useful life that exceeds one year but that are usually harder to convert to cash. Liabilities are claims, or debts, by suppliers, lenders, and other nonowners of the organization against a company’s assets. If you are a member of the gig economy, the quarterly estimated federal and local taxes you will need to pay on your annual income are a financial liability of your business.
The Income Statement: Picture of Organization’s Financial Results for a Specified Period of Time
The balance sheet depicts the organization’s overall financial worth at a specific point in time. By contrast, the income statement summarizes an organization’s financial results—revenues and expenses—over a specified period of time, such as a quarter or a year.
You will need to understand an income statement if you end up self-employed or start a business. We created a sample profit and loss statement for a two-person operation consisting of an owner and one employee (see Table 16.1 ). The company is doing quite well with $204,357 of net income, computed by subtracting total expenses fromPage 565 gross profit. You can also see the types of expenses that confront any small business. You have expenses for insurance, payroll and payroll taxes, accounting, auto, rent, supplies, and other expenses.