How to Read a Financial Report, 9th Edition

2 TWO BEDROCK FINANCIAL STATEMENTS

Need for Financial Information

Business managers, lenders, and investors need to know the financial condition of a business. They need a report that summarizes the business entity’s assets and liabilities, as well as the ownership residual of its assets in excess of liabilities. And they need to know the profit (or loss) performance of the business. They need information that summarizes sales revenue and expenses for the most recent period and the resulting profit or loss.

The means of communicating such financial information are financial statements. Accountants prepare the financial statements. They are the financial scorekeepers of the entity. Financial statements are sent regularly by a business to its managers, lenders, and investors—and, anyone else with a legitimate interest in the business for that matter. Financial condition is communicated in an accounting report called the balance sheet. Profit-motivated activities are presented in an accounting report called the income statement.

Alternative titles for the balance sheet include the statement of financial condition or the statement of financial position. An income statement may be titled as a statement of operations or an earnings statement. We stick with the names balance sheet and income statement to be consistent throughout the book. Informally, financial statements are called simply financials.

In almost all cases financial statements are supplemented with additional information, ...