Join Jim Stice for an in-depth discussion in this video Overview of the financial statements, part of Finance for Non-Financial Managers.
- We have talked about how accounting and finance involve compiling and using quantitative information in making decisions. How's that information conveyed? How do users see and digest that information? Well, within a company, quantitative information can take on many shapes and sizes. There are no rules as to how information is used within a company. A company can use the information that it develops within a firm in whatever way helps that company to make the best decisions. But once you step outside of a firm, there are rules.
Information used by potential investors and creditors is governed by rules, so that information can be compared across time for the same company, and across companies at the same point in time. Now we won't get bogged down in how those rules are created. Suffice it to say that there is a formal rule-making process to ensure that the information given by firms to those outside of the firm is relevant and reliable. Financial statements are a method in which the effects of lots of transactions are summarized and reported in a manner that is useful to users of financial statements who are standing outside the company.
The three most common financial statements are the balance sheet, the income statement, and the statement of cash flows. We will look at these three statements in a bit of detail as they are quite common. If you are evaluating a competitor's financial position, if you are evaluating a supplier's long-term viability, if you are a member of a labor union negotiating with a company, if you're assessing a customer's ability to pay, you will use these three financial statements as part of your assessment. Let's take a look at each of these in turn.
- Interpret financial reports and make decisions based on available data
- Manage inventory and receivables
- Create an accurate budget
- Cost a product or service
- Analyze customers
- Understand your income taxes
- Communicate your contribution to the bottom line