Page 414 - Business Principles and Management

Chapter 15 • Business Financial Records

15.3 Financial Reports

Goals Terms
• Describe the information contained • financial statements • capital
in a balance sheet statement and • balance sheet • accounting equation
the importance of that information • liabilities • income statement
to a business.
• Explain how an income statement
is different from a balance sheet
and the value of the income
statement to a business.

usiness activity is in large part measured in terms of money. The amount of
money a business earns, its level of profitability, and the return received by
Bowners and others who are involved in financing the business are important
measures of its success. Because of the importance of the financial performance
and financial condition of businesses, every business must (1) keep thorough and
accurate records, (2) prepare important financial reports regularly, (3) interpret
the financial information in the reports, and (4) make decisions that will have a
positive influence on future financial results.
Financial statements are reports that summarize financial data over a period of
time, such as a month, three months, half a year, or a full year. The two financial
reports businesses use most are the balance sheet and the income statement. Each
provides a specific view of the financial condition and financial performance of a
business. Each is necessary to determining whether a business is being well man-
aged or not.
Financial reports have many uses in business. Executives use them as a means
to run an efficient, profitable business. Suppliers, lenders, employee unions, govern-
ment agencies, and owners also use financial reports when making business
decisions. Figure 15-5 (see p. 402) lists some reasons why various users need
the financial information available in financial reports.

The Balance Sheet

A balance sheet, or statement of financial position, is a financial statement that
reports a business’s assets, liabilities, and capital on a specific date. As you learned
in the last lesson, assets are anything of value owned, such as cash and buildings.
Liabilities are claims against assets. In other words, liabilities are the business’s
debts. And capital (also called net worth, owner’s equity, or stockholders’ equity)
is the value of the owners’ investment in the business after subtracting liabilities
from assets.
A balance sheet has two sides. Assets are listed and totaled on the left. Liabili-
ties and capital are listed and totaled on the right. The two halves must always
balance—thus the name. That is, the total of all assets must equal the total of
all liabilities plus capital. In fact, the basic accounting equation is expressed as:

Assets Liabilities Capital

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