4.22: Introduction to Financial Statements
What you will learn to do: Examine the elements of common financial statements
There are many ways that we can describe a business—by product, by target market or even by geographic location. However, simply describing a business gives us little information about the internal workings of the business and how efficiently it is managing its resources. This internal examination is accomplished by looking at a company’s financial statements. These statements are like a company report card. They tell external (and internal) stakeholders how well the company is managing its financial resources. In order to understand this financial report card it is necessary to first have a basic understanding of how companies account for all of the financial transactions of the business using the double entry accounting system.
Once you see how financial transactions effect the various accounts you can move on to reading and understanding the key financial statements of the business. Ultimately these financial statements will be used to create annual financial reports that investors can use to evaluate the overall financial health of the business. As you can imagine, creating these financial statements is an essential part of managing a business.