2.1 Financial Statements

We use four financial statements to measure and report the performance of a firm:

  1. The balance sheet

  2. The income statement

  3. The statement of retained earnings

  4. The statement of cash flows

Together, these four financial statements contain much of the essential historical information about a firm’s performance and management choices. For the finance manager, the statements show where the money came from and where it went. Their format and interrelationships allow the finance manager to project future cash flow for projects of the firm, which is a key element in helping a manager decide whether to accept or reject projects.

Before managers can forecast future cash flow and make budgeting decisions, they must understand ...

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