| Accounting is considered to be one of those | | | | Finally, financing activities are those that |
| complicated yet necessary chores that keep | | | | affect the flow of money directly, such as |
| people's financial affairs relatively clean. | | | | the sale of common stock or adjustments in |
| For the beginner who is just getting started, | | | | long or short-term loans.These calculations |
| the process may not be the first obstacle. | | | | are then used to find the total increase (or |
| Often, it is understanding the special | | | | decrease) in cash and investments. |
| language used by accountants and those that | | | | Fluctuations in operations, investing, or |
| work around them. In other words, one must | | | | financing affect cash flow. This is called |
| wade through the jargon in order to | | | | the "net change" in cash and marketable |
| understand what's going on. The first step in | | | | securities. From here, these calculations are |
| gaining understanding of accounting is to | | | | checked against the balance sheet.Wait, a |
| break concepts down to one fundamental point: | | | | balance sheet? Isn't that what we just did, |
| financial statements.Corporations are | | | | balance?No. A balance sheet sums up a |
| extremely fond of financial statements - | | | | company's assets, liabilities, and value at a |
| after all, they are required to have them. | | | | certain point in time. Investors look to the |
| Financial statements are, in a broader sense, | | | | balance sheet to determine a company's value |
| just timely statements of the financial | | | | based on what the company owns and what they |
| situation of an organization. They hold | | | | owe to external sources. The amount of money |
| companies accountable for how money is earned | | | | invested by the shareholders affects company |
| and spent, down to the very last detail. | | | | value in this way as well. The balance sheet |
| Financial statements are often audited by | | | | follows a specific formula, where assets |
| external auditors to ensure that the company | | | | equal liabilities plus shareholder's equity. |
| is handling records properly. This also | | | | It is called a balance sheet because the two |
| confirms to third parties that the company is | | | | sides must balance out; after all, a company |
| displaying a fair and balanced view of the | | | | must pay for assets by either borrowing the |
| organization's position. These are also | | | | money directly, or through shareholders. The |
| called "cash flow statements". Like most | | | | balance sheet is clearly a great source of |
| financial concepts, financial statements can | | | | financial information on a company.The last |
| be broken down into several smaller concepts. | | | | line of defense, the profit and loss account, |
| They are: balance sheets, cash flow | | | | shows the activities of a company during a |
| statements, and profit and loss accounts.Cash | | | | period of time. This differs from the balance |
| flow statements is another term for financial | | | | sheet in that a profit and loss account |
| statements, but a little more specific. This | | | | serves as a log of a company's activities |
| statement shows exactly where the money goes | | | | over a period of time, while the balance |
| - how it was made, where it was made, and | | | | sheet is just the financial position at a |
| most importantly, how was it spent. A | | | | specific moment in time. Some value the |
| business, after all, has many areas where | | | | profit and loss account over the balance |
| money flows in and out: operating activities, | | | | sheet, as it marks a longer stretch of time |
| investing activities, financing activities.To | | | | than the balance sheet does.Once broken down |
| clarify, operating activities are the daily | | | | into parts, financial statements are not such |
| internal business a company relies on to | | | | a hard topic to handle, even for a beginner. |
| survive. This may include, but is not limited | | | | Financial statements expose the practices of |
| to: collecting money from customers, paying | | | | a company - while one does not get a specific |
| employees and vendors, interest and taxes, or | | | | blueprint of how a company makes or loses |
| even revenue from interest payouts. Investing | | | | money, the end results are clearly displayed |
| activities are generally investments made by | | | | for people to see. |
| the company to fund purchases of equipment. | | | | |