Hello, welcome to Financial Statements- a case study.
I'm Michael B. McDonald; I'm a professor of
finance at Fairfield University in Fairfield Connecticut,
and I'm a frequent consultant to corporations.
So, let's start with some basics.
There are three major financial statements you should be aware of:
the balance sheet, the income statement,
and the statement of cash flows.
Each of these three financial statements serves a unique purpose.
The balance sheet gives us a snapshot of where the firm is at a particular point in time.
It includes everything the company owes to others and everything the company owns.
Assets are everything the company owns and includes things like cash,
accounts receivable, inventory, land,
buildings, and the desks that the employees set up.
Liabilities are everything that the company owes to others: accounts payable,
notes payable, mortgages, bonds, bank loans, etc.
The difference between these two,
between assets and liabilities, is equal to the owners' equity.
So, assets minus liabilities equals owners' equity.
Owners' equity is, essentially, the net worth of the company,
the value of the firm after paying off all of the liabilities that the company owes.
While the balance sheet gives us a snapshot for where a company
is in terms of its assets and liabilities on a particular day,