1.5. Taking the Pulse of a Business: Financial Statements

I devote a good deal of space in this book to discussing financial statements. In Chapter 2, I explain the fundamental information components of financial statements, and then Part II gets into the nitty-gritty details. Here, I simply want to introduce you to the three primary kinds of financial statements so you know from the get-go what they are and why they're so crucial.

NOTE

Financial statements are prepared at the end of each accounting period. A period may be one month, one quarter (three calendar months), or one year. Financial statements report summary amounts, or totals. Accountants seldom prepare a complete listing of the details of all the activities that took place during a period, or the individual items making up a total amount. Business managers occasionally need to search through a detailed list of all the specific transactions that make up a total amount. When they want to drill down into the details, they ask the accountant for the more detailed information. But this sort of detailed listing is not a financial statement.

Outside investors in a business see only summary-level financial statements. For example, investors see the total amount of sales revenue for the period but not how much was sold to each and every customer.

1.5.1. Meeting the balance sheet and the accounting equation

One type of accounting report is a "Where do we stand at the end of the period?" type of report. This is called the ...

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