How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, 8th Edition

CHAPTER 2

THREE FINANCIAL STATEMENTS

Reporting Financial Condition, Profit Performance, and Cash Flows

Business managers, lenders, and investors need to know the financial condition of a business. For this purpose they need a report that summarizes its assets and liabilities, as well as the ownership interests in the residual of assets in excess of liabilities. And they need to know the profit (or loss) performance of the business. They need a report that summarizes sales revenue and expenses for the most recent period and the resulting profit or loss. And, they need a summary of its cash flows for the period. Therefore, these three types of financial information are reported regularly by businesses to their managers, lenders, and investors.

Financial condition is communicated in an accounting report called the balance sheet, and profit activities are presented in an accounting report called the income statement. Cash flows are communicated in the statement of cash flows. Alternative titles for the balance sheet include “statement of financial condition” or “statement of financial position.” An income statement may be titled “statement of operations” or “earnings statement.” We stick with the names balance sheet and income statement to be consistent throughout the book. The statement of cash flows is almost always called just that.

The term financial statements, in the plural, generally refers to a complete set that includes a balance sheet, an income statement, and a statement ...