Financial Statements Assignment: The Balance Sheet

Financial Statements
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Financial Statements
Financial statements are used to present formal records of financial activities of organizations over certain financial or trading period. They provide insights on these activities in monetary terms. There are four basic financial statements that are prepared by organizations, and each statement serves a different purpose. They can be prepared at any time of the year (end of the month, quarter or year) and any time span (monthly, quarterly and yearly). The basic financial statements being prepared by organizations include:
* The balance sheet.
It is also referred to as the statement of financial position because it presents the financial position of an organization at the end of a specified period. It summarizes the assets, liabilities and shareholder's equity of an organization over a certain period. These components give the readers insights of what the organization owns, owes and what has been invested in the organization by the shareholders (Brigham & Ehrhardt, 2013). From the balance sheet, an individual can assess the liquidity of the organization (the ability of the organization to meet its obligations).
* Assets. These are the things that are owned by an organization. They include all the resources that an organization has acquired and can be expressed in monetary terms. They are categorized into long-term assets such as machinery, vehicles and equipment; and current assets such as cash and debts.
* Liabilities. This is the amount that the organization owes to creditors. They are categorized into current liabilities that needs to be paid in the short term (less than a year) and long-term liabilities which take a long time to be paid (more than a year).
* Equity. It is thought to be the source of the organization's assets. It is determined by the amount of assets minus the amount of liabilities (Brigham & Ehrhardt, 2013).
From the summary of these components, there are various ratios that can be calculated to assess the liquidity of the organization. They include:
* Current ratio.
* Quick ratio.
* Operating cash flow ratio.
* Acid test ratio (Healy & Palepu, 2012).
* The Income Statement
It is also referred to as the profit and loss (P&L) account, statement of operations or stamen of income. This financial statement is used to show the profitability of an organization during a specified period. The time is chosen by the organization therefore, varying from time to time. It only shows revenues, gains, losses and expenses; is does not show money received or paid out (Libby, Libby, & Short, 2001). Its components include:
* Revenue. It is the amount of money an organization receives from the sale of its goods and services.
* The cost of goods sold. These are direct costs that are incurred in produc...