Non-Credit/General Financial Terms

Net Profit/Net Loss

Net profit or loss is one measure of a company’s financial performance. However, creditors and investors are also extremely interested in how much cash a business generates and how it is used. The statement of cash flows is a summary of the money flowing into and out of a firm. It is the financial statement used to assess the sources and uses of cash during a certain period, typically one year. All publicly traded firms must include a statement of cash flows in their financial reports to shareholders. The statement of cash flows tracks the firm’s cash receipts and cash payments. It gives financial managers and analysts a way to identify cash flow problems and assess the firm’s financial viability.

The statement of cash flows classifies cash receipts and disbursements as operating, investing, and financing cash

The Income Statement

An income statement is a financial report that shows a company's revenues, expenses, and profit (or loss) over a specific period, such as a month, quarter, or year.

It is one of the three primary financial statements, along with the balance sheet and cash flow statement.

Revenue− Expenses= Net Income (Profit) or Net Loss

Revneues

The income statement, sometimes called an earnings statement or profit and loss statement, reports the profitability of a business organization for a stated period of time. In accounting, we measure profitability for a period, such as a month or year, by comparing the revenues earned with the expenses incurred to produce these revenues.

The income statement contains the following:

Revenues are the inflows of cash resulting from the sale of products or providing services to customers. We measure revenues by the prices agreed on between the business and customer.

Expenses are the costs incurred to produce revenues. In other words, expenses are costs of doing business (typically identified as accounts with the word “expense”).

Net Income = Revenues − Expenses. Net income is often called the earnings of the company. When

Financial Accounting

Financial accounting focuses on preparing external financial reports that are used by outsiders; that is, people who have an interest in the business but are not part of the company’s management. Although they provide useful information for managers, these reports are used primarily by lenders, suppliers, investors, government agencies, and others to assess the financial strength of a business.

Note that both managerial and financial accounting involve preparing financial reports, but only in financial accounting do you prepare financial statements.

Managerial Accounting

As the term implies, managerial accounting provides financial information that managers inside the organization can use to evaluate and make decisions about current and future operations. For instance, the sales reports prepared by managerial accountants show how well marketing strategies are working, as well as the number of units sold in a specific period of time. This information can be used by a variety of managers within the company in operations as well as in production or manufacturing to plan future work based on current financial data. Production cost reports can help departments track and control costs, as well as zero in on the amount of labor needed to produce goods or services. In addition, managers may prepare very detailed financial reports for their own use and provide summary reports to top management, providing key executives with a “snapshot” of business operations in a specific timeframe.

Accounting

Accounting is the process of collecting, recording, classifying, summarizing, reporting, and analyzing financial activities. Accounting provides a framework for looking at past performance, current financial health, and possible future performance.

Key Financial Statements

When businesses present their financial condition to external stakeholders, taxing authorities, investors, and the general public, the most common format for this information is one of four key financial statements. These four statements are the Income Statement, Statement of Owners Equity (also called the Statement of Retained Earnings), Balance Sheet, and Statement of Cash Flows. These four statements, although representing different facets of the company’s finances, are all interconnected and create a birds-eye view of the company’s financial position.

assets

things of value owned by the organization

statement of retained earnings

explains the changes in retained earnings (or owner’s equity) between two balance sheet dates

statement of cash flows

a summary of the money flowing into and out of a firm, is the financial statement used to assess the sources and uses of cash during a certain period

Sarbanes-Oxley Act

a U.S. federal law enacted in 2002 to enhance corporate governance and financial reporting transparency, aiming to protect investors and restore public trust in the wake of major accounting scandals.

The Income Statement (Earnings Statement)

The income statement, sometimes called an earnings statement or profit and loss statement, reports the profitability of a business organization for a stated period of time. In accounting, we measure profitability for a period, such as a month or year, by comparing the revenues earned with the expenses incurred to produce these revenues.

The income statement contains the following:

Revenues are the inflows of cash resulting from the sale of products or providing services to customers. We measure revenues by the prices agreed on between the business and customer.

Expenses are the costs incurred to produce revenues. In other words, expenses are costs of doing business (typically identified as accounts with the word “expense”).

Net Income = Revenues − Expenses. Net income is often called the earnings of the company. When expenses exceed revenues, the business has a net loss.

Double-Entry Bookkeeping

The accounting equation must always be in balance (that is, the total of the elements on one side of the equals sign must equal the total on the other side). Suppose you start a coffee shop and put $10,000 in cash into the business. At that point, the business has assets of $10,000 and no liabilities. This would be the accounting equation:

Assets = Liabilities + Owners’equity

$10,000 = $0 + $10,000