- The focus of financial accounting is communicating
to people outside the company.
The primary target audience is lenders
and investors who are providing money
to the company to buy its assets.
These financial reports can be thought
of as three pieces of paper,
the balance sheet, the income statement,
and the statement of cash flows.
It is amazing how much information can be summarized about
a company on just three sheets of paper.
Think about Walmart and their 10 billion
customer visits per year.
The results of all that can be summarized in,
boom boom boom, three pieces of paper.
So what's on the balance sheet?
Three things, structured around our favorite equation.
It wasn't our favorite equation
before today maybe, but it is now.
The accounting equation.
Assets equal liabilities plus owner's equity.
If I've got assets, I had to get that money from somewhere.
I either borrowed it, a liability,
or it was provided to the company by shareholders, equity.
Assets equals liabilities plus equity.
That's the balance sheet.
The income statement can be summarized as follows.
Revenues minus expenses equal net income.
Revenues are the amount
of assets generated through doing business.
Expenses are the amount
of assets consumed in doing business.
The one number that is often used
to summarize the income statement is the earnings-per-share,
or EPS, which is the amount
of net income divided by the number
of ownership shares owned by the shareholders.
That's the income statement.
The statement of cash flows is the baby,
only 30 years old, and there
are three categories of cash flows.
Operating cash flows are the things that you do every day,
investing cash flows are the investments
in the productive capacity of the business,
buying more buildings and trucks and land and so forth.
Financing activities involve getting the money
to buy the stuff that I need through borrowing
and shareholder investment
and then repaying loans
and paying dividends to shareholders.
Of those three activities,
operating, investing, and financing,
cash flow from operating activities is the most important
because that summarizes the cash results of things
that we do on a daily routine basis.
These three financial reports,
the balance sheet, the income statement,
and the statement of cash flows,
summarize everything you need
to know about a company's financial performance.
That is financial accounting.