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Statement Analysis (LO3)
You are evaluating your company’s recent operating performance and are trying to decide on
the
relative weights you should put on the income statement, the balance sheet, and the statement of
cash
flows. Discuss the information each of these statements provides and its role in evaluating
operating
performance.
Solution
Answer:
The four basic financial statements are:
1. The balance sheet reports a firm’s assets, liabilities, and equity at a particular point in
time.
Assets = Liabilities + Owners Equity, or A=L+OE
2.Income statement: The income statement (also known as the profit and loss statement or
P&L) tells you both the earnings and profitability of a business. The P&L is always for a specific
period of time, such as a month, a quarter or a year.
The format of the income statement has been determined by a series of accounting
pronouncements; some of these are decades old, others released in the past few years. Like the
balance sheet, the income statement is broken into several parts:
3. Statement of Cash Flows shows the firm’s cash flows over a given period of time. This
statement reports the amounts of cash that the firm generated and distributed during a particular
time period. The bottom line on the statement of cash flowsthe difference between cash sources
and usesequals the change in cash on the firm’s balance sheet from the previous year’s
cash account balance.
4.The statement of retained earnings provides additional details about changes in retained
earnings during a reporting period. This financial statement reconciles net income earned during
a given period and any cash dividends paid within that period on one side with the change in
retained earnings between the beginning and ending of the period on the other side.

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  • 1. Statement Analysis (LO3) You are evaluating your company’s recent operating performance and are trying to decide on the relative weights you should put on the income statement, the balance sheet, and the statement of cash flows. Discuss the information each of these statements provides and its role in evaluating operating performance. Solution Answer: The four basic financial statements are: 1. The balance sheet reports a firm’s assets, liabilities, and equity at a particular point in time. Assets = Liabilities + Owners Equity, or A=L+OE 2.Income statement: The income statement (also known as the profit and loss statement or P&L) tells you both the earnings and profitability of a business. The P&L is always for a specific period of time, such as a month, a quarter or a year. The format of the income statement has been determined by a series of accounting pronouncements; some of these are decades old, others released in the past few years. Like the balance sheet, the income statement is broken into several parts: 3. Statement of Cash Flows shows the firm’s cash flows over a given period of time. This statement reports the amounts of cash that the firm generated and distributed during a particular time period. The bottom line on the statement of cash flowsthe difference between cash sources and usesequals the change in cash on the firm’s balance sheet from the previous year’s cash account balance. 4.The statement of retained earnings provides additional details about changes in retained earnings during a reporting period. This financial statement reconciles net income earned during
  • 2. a given period and any cash dividends paid within that period on one side with the change in retained earnings between the beginning and ending of the period on the other side.