The four financial statements required by GAAP, (“Generally Accepted Accounting Principles”),
are the Balance Sheet, the Income Statement, the Statement of Cash Flow, and the Statement
of Owner’s Equity.
The Balance Sheet, sometimes referred to as the Statement of Financial Position, provides
the users of financial statements a snapshot of the company’s financial position as of
a specific date in time.
The balance sheet shows the general categories of accounts: Assets, Liabilities, and Equity.
These three categories constitute what is known as “The Accounting Equation”:
Which is Assets equals Liabilities plus Owners Equity
The Income Statement, or Statement of Operations, or Statement of Profit and Loss, provides
the users of financial statements a picture of the income and expenses of the company
over a period of time.
Typically, the Income statement shows information for a calendar year.
Sometimes, the income statement can be for a non-calendar year or a fiscal year basis,
which means any twelve month period.
The Income Statement is made up of two general types of accounts: Revenues and Expenses.
Net Income is computed by taking the company’s Revenues and subtracting the company’s Expenses
for the period.
When Expenses are greater than Revenues, then there is said to be a Net Loss.
For GAAP purposes, the Income Statement is prepared using the Accrual method of accounting
under most circumstances.
The Statement of Cash Flows provides the users of financial statements a reconciliation of
the company’s beginning and ending cash.
Any cash that comes into the business is referred to as Cash Inflows.
Any cash that goes out of the business is referred to as Cash Outflows.
The cash inflows and outflows are shown separately for each of the three business activities,
namely, Operating Activities, Investing Activities, and Financing Activities.
The Statement of Owners Equity provides the users of financial statements a reconciliation
of the company’s beginning and ending equity accounts.
This statement can have different formats, depending on the type of legal entity.
When a Statement of Owner’s Equity is presented for a corporation, the statement might show
increases for Net Income and Stock Issuance, and for decreases, the statement might show
Net loss, Dividends and Stock Buy-Backs.
These four statements make up the Financial Statements required by GAAP.
For more detailed explanations of these Financial Statements, and the different presentations
and calculations that are used, visit the AccountingWITT Channel or AcccountingWITT.com.