Page 435 - Introduction to Business

CHAPTER 12 Financial Reporting 409

reality Do you or anyone you know own any stock? If so, do you follow the
CH ECK stock price?

The Four Financial Statements

LEARNING OBJECTIVE 2
Define the components of the four financial statements.

Accounting is called the language of business because it provides information that
people need to make effective business decisions. The most important output of
the accounting information system is the set of financial statements. These financial statements The income
accounting reports include the income statement, the statement of retained earn- statement, statement of retained
earnings, balance sheet, and statement
ings, the balance sheet, and the statement of cash flows. Together, these four state-
of cash flows, which together represent
ments represent a business firm in financial terms. Each statement corresponds to a business firm in financial terms
a specific date or a designated time period, such as a year. If you were a manager or
an investor, what would you like to know about the firm at the end of a time period?
There are four essential questions that are answered by the four financial state-
ments. These are shown in Exhibit 12.1.

Income Statement

The income statement is also referred to as the statement of operating results or the income statement The accounting
statement of earnings. This accounting report shows the firm’s revenues, expenses, report that shows the firm’s revenues,
expenses, and net income or net loss
and net income or net loss for the period. The income statement for Cathy’s Candy
for a period
Company is shown in Exhibit 12.2 (on p. 410). Cathy’s Candy Company, the parent
firm, owns other firms that are its subsidiaries. To provide a full accounting of all the
resources that Cathy’s Candy Company controls, the amounts shown on the finan-
cial statements include figures for both Cathy’s Candy Company and its subsidiaries.
Most firms’ financial statements show the consolidation of the parent firm and its
subsidiary firms. That is the reason the word consolidated is used in the title.

EXHIBIT 12.1

Fundamental Financial Questions and Answers

Which Financial
How to Find the Statement Shows This
Question Answer Information
How much did the Revenues Income statement (also
firm earn or lose from expenses referred to as statement of
operations during the Net income (or net loss) operating results or
period? statement of earnings)
In what way did Beginning retained earnings Statement of retained
the firm's retained net income (or net loss) earnings
earnings change dividends
during the period? Ending retained earnings
What is the firm's Assets Balance sheet (also
financial position at liabilities referred to as statement of
the end of the period? Owners’ equity financial position)
What amount of Operating cash flows Statement of cash
cash was generated investing cash flows flows
and spent during financing cash flows
the period? Increase (or decrease) in
cash during the period

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