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Banks, people, shareholders and other stakeholders base their decisions to invest in a business on their ability to generate profits and maintain stability. Financial statements are essential to evaluate the management of a firm of assets, liabilities, income and expenses. The balance sheet and the income statement are examples of revised financial statements before making investment decisions.
Balance Sheet: Goods
The balance sheet summarizes the values of the objects owned by a business and those owed on that date. This sheet has three areas: assets, assets and net worth. The assets are located to the left of the balance sheet. They represent what the business owns and are listed as current or subject to change. Current assets represent cash and other assets that will become cash within the next 12 months. Examples of this are inventory, accounts and receivables. Assets subject to change represent physical assets such as vehicles and equipment; and not physical as a registered trademark and goodwill.
Balance sheets: Liabilities and Net Equity
Liabilities and equity are located on the right side of the balance sheet. The liability represents the current and long-term debt of the business. The current liability reflects what is due to creditors in less than 12 months, while the long-term liability is that due for more than 12 months. Current liabilities include payable accounts and current payments of long-term liabilities. The long-term liability includes mortgages, bonds and documents payable. The net worth is located under liabilities on the sheet. It represents the interests of the shareholders or participants of a company. The main components of equity are paid in capital, retained earnings and common shares.
Income Statement: Single Step
The income statement reflects the profits and expenses of a business over a certain period of time. Earnings represent the flows of money related to sales and expenses, related to generating the product sold. Income statements can have two formats: single step or multi step. The one-step is declared in a group and aggregates all expenses in a section. Total expenses are subtracted from total income to reach net income. This is useful for users looking for simplicity.
Income Statement: Multipass
Multi-step income statements are complex due to gross profits, which are obtained from sales less the cost of goods sold; operating expenses associated with the activities performed; and other expenses and income such as profits, losses, expenses and investments, grouped into individual sections. The total of each tax-free section (subtotal) is calculated. Then, taxes are subtracted to reach net income. This method is useful for users interested in analyzing trends in operating and non-operating expenses and profits of a business.
If the total assets of the spreadsheet do not match the sum of the total net worth plus the liability, it has been miscalculated. When you choose a format and income, the one-step or multi-step format can be used, reaching the same result.