Every company wants to know how it is performing financially. The business owner wants to see that the company is generating revenue and growing in value. Financial statements communicate this performance by summarizing the financial results for the period. GAAP, or generally accepted accounting principles, require companies in the United States to prepare three integral financial statements for users. These financial statements serve the same purpose for each company.
Generally accepted accounting principles refer to a set of guidelines companies use when recording financial transactions and preparing their financial statements. Companies with more than $5 million in annual sales or who trade stock publicly must follow GAAP accounting. Many other companies choose to follow these principles to remain consistent. GAAP requires companies to prepare an income statement, a balance sheet and a cash flow statement each period.
The income statement tells investors and business owners the amount of revenue the company earned during the period. The revenues and expenses appear on this financial statement. The income statement calculates the net income for the period. Most income statements also report the earnings per share. This calculation determines what portion of the company's net income applies to each share of the company's stock. The income statement reports the financial activities for a specific time period.
The balance sheet provides information regarding the company's assets and financing for those assets. Companies acquire financing by borrowing money or through owner investments. When a company borrows money, it reports a liability. When a company receives an owner investment, it reports an increase in equity. The total liabilities and equity balances equal the total assets. The total equity communicates the net worth of the business. The balance sheet reports the account balances for a specific date.
Cash Flow Statement
The cash flow statement shares information regarding the cash management of the company. GAAP requires companies to prepare the income statement and the balance sheet using accrual accounting. The financial statement users cannot see how the company manages its cash from these statements. The cash flow statement, however, shares information regarding the company's cash transactions. This statement separates transactions between operating, financing or investing activities.
- Goodshoot/Goodshoot/Getty Images