Interpreting
Financial
Statements
What the Income Statement
Says…
•business name and accounting period
•sources of revenue realized during the period
•expenses (expired costs) incurred during the period
•net income (or net loss)
What the Income Statement
DOESN’T Say…
•prediction of future income
•precise net income
Why? It’s difficult to know exactly what revenues resulted from
this month’s advertising expense, etc.
•“true profit”
Why? We would have to include the liquidated value of the
business assets (minus capital contributions) to figure out the
“true profit” generated by the business over it’s lifetime.
•net income does NOT indicate cash
What the Balance Sheet
Says…
•business name (entity concept) – not the owner’s assets or debts
•assets (items of value owned by the business)
•liabilities (legal claims against the assets held by outside parties)
•owner’s equity (owner’s claim in the assets of the business)
•ability of the business to pay its short-term and long-term debts
For example, current assets versus short-term liabilities
What the Balance Sheet
DOESN’T Say…
•how net income was earned (look to the Income Statement for this)
•specific claims of creditors against specific assets
•capital does not equal cash – just a general claim in the assets
•actual “market-value” or “current worth” of the business
Why? The real value of many assets lies in their ability to
generate income. A $2,000.00 computer in the hands of a skilled
graphic artist is worth more than just $2,000.00