Income statement and balance sheet - Essay Example

The business community has more accumulated wealth that the governments of the over 200 countries in the world combined.There are thousands of publicly traded companies been traded on Wall Street and international markets such as the London Stock Exchange every day. Due to the importance of these capital markets there is a need for professionals dedicated to financial reporting. Publicly traded companies have to prepare financial statements every accounting period. The normal accounting period is one year, but most companies also release quarterly financial statements.

The four major financial statements are the income statement, balance sheet, statement of cash flow, and statement of stockholders equity. These four financial statements are included in the Annual Report of corporations. The purpose of this paper is to analyze and describe the income statement and the balance sheet. The income statement and the balance sheet are two interrelated statements. The outcome of the income statement affects the equity account of the balance sheet. The income statement is a financial report that provides information regarding the profitability of the company during an accounting period.

The top figure in the income statement is sales. Sales are very important because they provide the economic asset needed to operate a business. The sales of the company are subtracted by the cost of goods sold. The subtraction of those variables is the gross profit. At the bottom of the income statement the operating expenses and taxes are subtracted from gross profit to arrive at net income. The income statement is a very valuable report because it indicates how well a business operation is doing in terms of financial success.

The income statement reports the revenues and expenses of an enterprise during a natural or fiscal year. The top and bottom figures of the income statement are the two numbers investors look for which are sales and net income. The higher the figure of net income the better off a company is financially. Net incomes help companies accumulate capital. The net income figure is transferred from the balance sheet to the stockholder’s equity section. The second major financial statement is the balance sheet.

The balance sheet is considered a statement of position. This means that the figures illustrated in the balance are the account balances at a specific point in time. The three major components or categories within the balance sheet are assets, liabilities and stockholder’s equity. The internal structure of the balance sheet follows the logic of the basic accounting equation. The basic accounting equation states that assets are equal to liabilities plus stockholder’s equity. An asset can be defined as an item of economic value owned by an individual or corporation (Answers, 2011).

The assets in the balance sheet are listed in order to liquidity. The most liquid asset is cash. Equipment and machinery are two examples of assets. Machinery is a fixed asset that can be used to generate revenues. Assets can also be converted to cash by selling them. The liabilities of a company are short and long term obligations to financial institutions such as banks. It is preferable for a company to have a low level of debt. Debt instruments can be used to finance expansion projects. The debt section of the balance sheet is divided into short and long term liabilities.

The last segment of the balance sheet is the equity section. The balance sheet and the income statement are prepared once the accounting department completes the accounting cycle. These two financial statements are extremely valuable pieces of information for the user of financial information. It is mandatory for public companies to release the financial statements at least once a year. The regulatory agency that foresees the financial actions of public corporations is the Securities and Exchange Commission (SEC).

The data in the balance sheet and income statement can be used by financial analyst or anyone with financial knowledge to perform ratio, trend,