2.1. Introducing the Information Content of Financial Statements

This chapter focuses on the basic information components of each financial statement reported by a business. In this first step, I do not address the classification, or grouping, of these information packets within each financial statement. The first step is to get a good idea of the information content reported in financial statements. The second step is to become familiar with the "architecture," rules of classification, and other features of financial statements, which I explain in Part II of the book.

2.1.1. Setting up the business example

To better illustrate the three primary financial statements, I need a realistic business example. The information content of its financial statements depends on the line of business a company is in — in other words, which types of products and services it sells. The financial statements of a movie theater chain are different from those of a bank, which are different from those of an airline, which are different from an automobile manufacturer. Here, I use a fairly common type of business example.

Here are the particulars of the business I use for the example:

  • It sells products, mainly to other businesses.

  • It sells on credit, and its customers take a month or so before they pay.

  • It holds a fairly large stock of products awaiting sale (its inventory).

  • It owns a wide variety of long-term operating assets that have useful lives from 3 to 30 years or longer (a building, machines, ...

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