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Using the Four Financial Statements

1) Key Things To Know 5) Medium Practice Test
2) Self Test 6) Hard Practice Test
3) Practice as You Learn  
4) Easy Practice Test  


Key Things to Know


Statement of Stockholder’s Equity: Reports changes to the stockholder’s equity accounts; transactions that impact the owners of the company.


Common Format:



Note: A public company’s statement of stockholder’s equity lists many transactions that are not discussed in the introductory financial accounting class. Every transaction that impacts owners is listed on the statement of stockholder’s equity. The items listed on the left are the transactions generally discussed in an introductory financial accounting class.



The Cash Flow Statement:


The cash flow statement reports the cash generated from operations, how cash is invested in long-term assets, and how the company finances operations.


The Cash Flow Statement includes three separate sections: 1) operating activities, 2) investing activities, and 3) financing activities



Operating Activities:


Reports the cash generated from selling to customers and operating the business that can be used to grow the company or repay debt. .


Two different methods (formats) are used for the operating section:


1) Direct: States cash received and cash paid for specific items.

How much cash was received from customers is stated.

How much cash was paid for key expenses is stated.


2) Indirect: Begins with net income (which is not cash) and states all the items

that cause a difference in net income and cash received or paid

related to operations during the period.


The difference in net income and cash are:


1) “non cash” items

2) changes in current assets and current liabilities



Investing Activities:


Reports cash paid (purchases) or received (sold) related to long-term assets


The amount reported on the cash flow statement is the cash paid or received.



Financing Activities:


Reports cash related to long-term debt; borrowings or repayments


Reports cash related to owners; received from owners or paid to owners


The amount reported on the cash flow statement is the cash paid or received.




Note: This section does not discuss preparing the cash flow statement. See the cash flow statement section of this website for information on how to prepare the cash flow statement.


See the Balance Sheet and Income Statement Sections for further discussion on these financial statements.





Using all of the financial statements to understand a company’s operations and financial position:


The four financial statements each present information in a different way:


Balance Sheet: Cumulative, amounts are a running total to date.


The balance sheet answers questions related to what the company




Income Statement: Net Earnings for a certain period of time.

Amounts are earned and incurred and are not the cash

paid or received.


The income statement answers questions related to what the company





Cash Flow Statement: States the CASH the company received or paid during

a certain period of time.


Cash from Operations: Gives the net CASH from day to day



Cash from Investing: Gives the CASH paid or received for

all long term assets.


Cash from Financing: Gives the CASH received from borrowing

or paid to repay borrowings.

Gives the CASH paid to investors or

received from investors.




Statement of Stockholders’ Equity: States transactions directly with owners.

Amounts are for a certain period of time.

The statement shows one year on top of another. The most

current year is normally at the bottom of the statement.


A description of the transactions with owners is listed on the left side

of the statement. The amount is in the column of the account

that changed.






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