Basic Financial Statements

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The Four Basic Financial Statements A study

1. Balance sheet,
2. Income statement,
3. Statement of retained earnings,
4. Statement of cash flows,
These four financial statements are the basic statements normally prepared by profit-making organizations for use by investors, creditors, and other external decision makers.
The four basic statements summarize the financial activities of the business. They can be prepared at any point in time (such as the end of the year, quarter, or month) and can apply to any time span (such as one year, one quarter, or one month
The Balance Sheet
The purpose of the balance sheet is to report the financial position (amount of assets, liabilities, and stockholders' equity) of an accounting entity at a particular point in time. Structure
Notice that the heading specifically identifies four significant items related to the statement:
1. Name of the entity,
2. Title of the statement, Balance Sheet.
3. Specific date of the statement, At December 31, 2009.
4. Unit of measure (in thousands of dollars).
The organization for which financial data are to be collected, called an accounting entity, must be precisely defined. On the balance sheet, the business entity itself, not the business owners, is viewed as owning the resources it uses and as owing its debts. The heading of each statement indicates the time dimension of the report. The balance sheet is like a financial snapshot indicating the entity's financial position at a specific point in time—in this case, December 31, 2009—which is stated clearly on the balance sheet. Financial reports are normally denominated in the currency of the country in which they are located. U.S. companies report in U.S. dollars, Canadian companies in Canadian dollars, and Mexican companies in Mexican pesos. Medium-sized companies

A balance sheet first lists the company's assets. Assets are economic resources owned by the entity. It next lists its liabilities and stockholders' equity. They are the sources of financing or claims against the company's economic resources. Financing provided by creditors creates a liability. Financing provided by owners creates owners' equity. Since Maxidrive is a corporation, its owners' equity is designated as stockholders' equity.1
Since each asset must have a source of financing, a company's assets must, by definition, equal the combined total of its liabilities and stockholders' equity. This basic accounting equation, often called the balance sheet equation, is written:
The basic accounting equation shows what we mean when we refer to a company's financial position: the economic resources that the company owns and the sources of financing for those resources.
Assets are the economic resources owned by the company.
Every asset on the balance sheet is initially measured at the total cost incurred to acquire it. Balance sheets do not generally show the amounts for which the assets could currently be sold.
Liabilities are the company's debts or obligations. Under the category Liabilities, Maxidrive lists two items. The accounts payable arise from the purchase of goods or services from suppliers on credit without a formal written contract (or a note). The notes payable result from cash borrowings based on a formal written debt contract with lending institutions such as banks.
Stockholders' equity indicates the amount of financing provided by owners of the business and earnings. The investment of cash and other assets in the business by the owners is called contributed capital. The amount of earnings (profits) reinvested in the business (and thus not distributed to stockholders in the form of dividends) is called retained earnings. equity is the sum of the contributed capital plus the retained earnings.

The Income Statement
The income statement (statement of income, statement of earnings, or statement of operations) reports the accountant's primary measure of