Interrelationships between accounting equation components and financial statement controls

¶ … financial statements of Barnes and Noble and Borders Group for fiscal year 2009. The companies' statements provide information about their financial health, as well as discuss plans for the coming fiscal year.

The balance sheet reveals detailed information about each company's assets, liabilities and owners' equity (net worth). It is based on the accounting equation Assets = Liabilities + Stockholders' Equity; the two sections of the balance sheet must equal each other just as they do in the equation. This equation represents the basic accounting premise: assets, the means used to operate the company, are balanced by a company's financial obligations, along with the equity investment brought into the company along with its retained earnings (Investopedia, n.d.).

As both the Barnes and Noble and Borders Group statements show, there are four main financial statements:

The balance sheet, which shows what a company owns and what it owes at a fixed point in time

The income statement (or statement of operations), which shows how much money a company made and spent over a period of time

The cash flow statement, which shows the exchange of money between a company and the outside world over a period of time

The statement of owners' equity, which shows changes in the interests of the company's shareholders over time

The statements are all interrelated. Changes in assets and liabilities that are shown on the balance sheet are also reflected in the revenues and expenses shown on the income statement, which result in the company's gains or losses. Cash flows provide more information about cash assets that are listed on a balance sheet; they are related, but not equivalent, to net income shown on the income statement. No single statement tells the complete picture of a company's financial health, but taken together they provide powerful information. (Securities and Exchange Commission, 2005).

In addition to the financial statements, both the Borders Group and Barnes and Noble statements present information included in footnotes. Both companies' footnotes describe accounting policies and practices that impacted the financial statement portrayal of their financial conditions. Borders' footnotes discussed their losses from discontinued operations, treatment of leases, and goodwill impairment; Barnes and Noble's footnotes discussed taxes, stock options and loss from discontinued operations, to name just a few.

The annual reports also include financial performance information included in Management's Discussion and Analysis of Financial Condition and Results of Operations. SEC rules require disclosure about trends, events, or uncertainties known to management that would have a material impact on reported financial information. The MD&A lets management provide investors with its view of the financial performance of the company, giving them an opportunity to tell investors what the financial statements show and don't show. The MD&A also discusses important trends and risks that have shaped the past or are reasonably likely to shape the company's future.