Rview of Financial Statements - Essay Example

The second largest home improvement retailer, Lowe’s, was founded in 1946 (Lowes, . The biggest competitor to Lowe’s is the industry leader Home Depot. The financial statements of these two companies provide valuable information regarding the performance of the enterprises. In order to understand financial statements one must comprehend the basic accounting concepts, transactions and terminologies associated with the statements. The financial statements are the last part of the accounting cycle.

The accounting cycle normally takes one year to be completed. Accountants keep track of the financial activity of a company by recording journal entries. The eight steps of the accounting cycle are: record transactions in journal, post transactions to ledger, prepare adjusting entries, prepare summary of account balances, prepare income statement and revenue and expense accounts, close revenue and expense accounts to retained earnings, prepare post closing summary of account balances, prepare balance sheet and statement of cash flow.

Once the accountants of Lowe’s and Home Depot complete the accounting cycle the financial statements are ready. The income statement is a statement that states the profitability of a company. At the top of the statement the revenues of the company are expressed. The costs of goods sold are subtracted to arrive at the gross profits. Then the operating expenses and taxes are subtracted to obtain the net income of the firm. The revenues and net income of Lowe’s in fiscal year 2009 were $47.22 billion and $1.

783 billion (Annual Report: Lowes, 2009). In 2009 Home Depot’s performance was better. Home Depot in 2009 had revenues of $66.18 billion and net income of $2.66 billion (Annual Report: Home Depot, 2009). The balance sheet is a financial statement that reflects the financial position of a company at a specific point in time. The basic elements of the balance sheet are the assets, liabilities, and stockholder’s equity. The balance sheet must comply with the basic accounting equation which states that assets equal liabilities plus stockholder’s equity.

The statement of retained earnings at the top shows the initial balance of retained earnings from the prior period. The net income is then added and the dividends are subtracted. The last line reflects the final retained earnings for the period. This figure is then moved to the equity section of the balance sheet. The statement of cash flows shows the movement of cash during an accounting period. There are three types of activities reflected in the statement of cash flow. The three activities are financing, operating, and investing.

References Annual Report: Home Depot (2009). Retrieved March 4, 2011 from http://www.homedepotar.com/2009HD10-K.pdf Annual Report: Lowes (2009). Retrieved March 4, 2011 from http://www.lowes.com/AboutLowes/AnnualReports/annual_report_09/pdf/Lowes_2009AR_bookmarks.pdf Lowes.com (2011). Our Heritage. Retrieved March 7, 2011 from http://media.lowes.com/history/