Financial Statements as We Learned

Financial Statements

As we learned in Chapter one "the purpose of financial information is to provide inputs for decision making" (the book pg. 6). The balance sheet, cash flow statements, retained earnings and income statements all provide that financial information. The balance sheet is important because it presents the company's assets vs. liabilities. A company's assets are what it owns, and its liabilities are what it owes.

Examples of assets include (but are not limited to); physical buildings and real estate, machinery, cash in the bank, and the amount of money other companies or individuals owe to the company. Oftentimes business' will purchase CD's, stocks and bonds that are also included in the asset column.

A company has liabilities when it owes other firms or individuals money either for services rendered or products purchased. Examples would be if a printing company bought a printing machine for $1,000,000 and paid a deposit of $250,000. The listed liability would be $750,000 owed to the company from which the machine was purchased.

A company uses its balance sheet to present investors a net worth and a strong balance sheet allows a company leeway to make additional purchases including other companies. One recent article espouses the fact that many medical firms are looking to grow through acquisition. Matthew Weinstock writes, "despite the recent crisis in the bond market, the nation's elite not-for-profit health care systems continue to expand their prowess" (Weinstock, 2008, pg. 41).

According to Weinstock, they are doing this by acquisitions, partnerships, and affiliations. He said, "all are relying on strong balance sheets to fund expensive information technology projects with the hope of improving patient safety and quality of care" (Weinstock, pg. 41).

The company's income statement shows how much revenue is being brought in to the company as compared to how much is being spent on expenses. Companies use the income statement to show how successful the company is during specific time frames. Investors often want to know how much money is being brought in, they want to know that the company has enough funds to pay the operating expenses and any liabilities the company has.

Those same investors oftentimes wish to receive dividends on their shares of stock. They can ascertain whether the company has the means to do this by perusing the retained earnings statement. The retained earnings statement shows how much money the company has paid out, as well as how much the company has kept for future growth. If investors wish to buy a company that is going to be a strong growth company, then retained earnings is important because it will show that the company has the funds to do so.