K: Let’s talk a little about financial statements. These reports provide some of the raw data people use in making financial decisions.
J: The first primary financial statement is the balance sheet. A balance sheet is a listing of a company’s valuable resources, its assets.
K: A balance sheet also shows the three general sources that companies use to get money to buy assets. First, they can borrow it. Second, the owners can take money from their private savings and invest it in the business. And third, the company can generate profits that are then kept in the business to buy more assets.
J: The second primary financial statement is the income statement. An income statement is a report telling how much money a company made during the month, or the quarter, or the year … whatever period is covered by the income statement.
K: It seems like people are always talking about companies’ income statements.
J: Yes. You often hear in the business news about a company’s “net income.”
K: The third primary financial statement is the statement of cash flows.
J: Let me give you a lesson in accounting terminology. When in doubt, say it slowly. So, what is a “statement of cash flows”? It is a STATEMENT of a company’s CASH FLOWS.
K: So, just a report of cash in and cash out?
J: Yep, that’s it.
K: So, the three primary financial statements are the balance sheet, the income statement, and the statement of cash flows.
K: Which is your favorite one?
J: Ooh. Now that’s a tough question. I’m going to have to think about that …