Business Financial Statements

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Financial statements provide information of value to company officials as well as to various outsiders, such as investors and lenders of funds. Publicly owned companies are required to periodically publish general-purpose financial statements that include a balance sheet, an income statement, and a statement of cash flows. Some companies also issue a statement of stockholders' equity and a statement of comprehensive income, which provide additional detail on changes in the equity section of the balance sheet. Financial statements issued for external distribution are prepared according to generally accepted accounting principles (GAAP), which are the guidelines for the content and format of the statements. In the United States, the Securities and Exchange Commission (SEC) has the legal responsibility for establishing the content of financial statements, but it generally defers to an independent body, the Financial Accounting Standards Board (FASB), to determine and promote accepted principles.

The balance sheet, also known as the statement of financial position or condition, presents the assets, liabilities, and owners' equity of the company at a specific point in time. The assets are the firm's resources, financial or nonfinancial, such as cash, receivables, inventories, properties, and equipment. The total assets equal (balance) the sources of funding for those resources: liabilities (external borrowings) and equity (owners' contributions and earnings from firm operations). The balance sheet is used by investors, creditors, and other decision makers to assess the overall composition of resources, the constriction of external obligations, and the firm's flexibility and ability to change to meet new requirements.

Firms frequently issue a separate statement of stockholders' equity to present certain changes in equity, rather than showing them on the face of the balance sheet. The statement of stockholders' equity itemizes the changes in equity over the period covered, including investments by owners and other capital contributions, earnings for the period, and distributions to owners of earnings (dividends) or other capital. Sometimes companies present a statement of changes in retained earnings rather than a statement of stockholders' equity. The statement of changes in retained earnings, also known as the statement of earned surplus, details only the changes in earned capital: the net income and the dividends for the period. Then the changes in contributed capital (stock issued, stock options, etc.) must be detailed on the balance sheet or in the notes to the financial statements.