UNDERSTANDING FINANCIAL STATEMENTS Research Paper

UNDERSTANDING FINANCIAL STATEMENTS - Research Paper Example A balance sheet is split into three parts; assets, liabilities and stockholder’s equity. Assets are the economic resources possessed by a firm. Liabilities are a firm’s debt or obligations to acquire its assets. Stockholder’s equity is the total value of a firm’s common stock in addition to the additional paid-in capital and retained earnings. A basic rule of finance is that all business transactions are documented on the balance sheet at the dollar value actually decided at the time of the transaction. This suggests that, recording all of the firm’s transactions at their historic cost is the factor that the net worth of the firm illustrated on the balance sheet should not be mixed with the sales or appraised value. Net worth or stock holder’s equity on the balance sheet simply shows the difference between assets and liabilities (Bernstein & Wild, 2000). Income statement, which is also known as the profit and loss statement, statement of operations or statement of income, is another major financial statement. Income statement summarizes the firm’s revenues and expenses over a specified time, concluding with the net income or loss for the period. The income statement is divided into three parts; revenue, expenses and the net income. Revenue is cash inflows or acquiring of assets of a firm during a specified period. Expenses are the outflow or using of the assets, or incurrence if liabilities during a specified period. Net income on an income statement is the total sum earned or lost by the firm during the accounting period. Using the accrual method of accounting, sales are documented on the income statement when the goods and/or services associated with those sales are delivered or shipped to the customer. The cost of goods sold is recorded on the income statement at the same time the sales are recorded. Sales and cost of good s sold are also recorded in spite of of when the firm gets cash for the goods delivered