Accounting For Dummies®, 4th Edition

Part II: Figuring Out Financial Statements

In this part . . .

Financially speaking, managers, owners, and lenders want to know three basic things about a business: its profit or loss, its financial condition, and its cash flows. Accountants answer this call for information by preparing on a regular basis three financial statements, which are detailed in this part.

The income statement summarizes the profit-making activities of the business and its bottom-line profit or loss for the period. The balance sheet reports the financial position of the business at a point in time — usually the last day of the profit period. The statement of cash flows reports the amount of cash generated from profit and other sources of cash during the period, and what the business did with this money. Its financial statements tell the financial story of the business, for good or bad.

One word of caution: The numbers you see in its financial statements depend, to a significant extent, on which accounting methods the business chooses. Businesses have more accounting alternatives than you may think. In painting the financial picture of a business, the accountant can use somber or vivid colors from the palette of acceptable accounting methods.