Notes

Learn about the types and importance of financial statements. See the financial statement definition, and study the purpose of financial statements.
Kaycie and the Financial Statements
Kaycie just got home from school. For the first time ever, she's ready to start on her homework. Tonight, she gets to do a report on her favorite band, the Financial Statements. She can't wait to get to school tomorrow and tell everybody what the Financial Statements are, what they do and why they are important. This is going to be the best homework she has ever done! Kaycie quickly sits down at the desk in her room and starts writing.

Introducing the Financial Statements
Have you ever heard of the Financial Statements? No? Well, let me introduce them to you. The Financial Statements are a group of reports that tell a company's financial status at a certain point in time. From company owners to potential investors and everyone in between, the fan base of the Financial Statements is far and wide. Everybody is interested in them.

Some people are interested in Financial Statements because they want to know how much money they made. Some are interested in them because they want to know how much money they spent. Some are interested in them because they want to know how much money was reinvested in the company. Some just want to know whether or not they should invest themselves. Regardless of the reason, when the Financial Statements start playing a tune, people listen.

What Do Each of the Financial Statements Do?
Now it's time to introduce you to each one of the Financial Statements individually.

Issy is the lead singer of the group. His name, Issy, is short for Income Statement. Issy's job is to let fans know whether a company made or lost money in a given time period.

Next is the bass player, Sore, which is short for Statement of Retained Earnings. It is Sore's job to let fans know how much money that's made is retained and reinvested in the company.

The keyboard is played by Bash. Bash's real name is Balance Sheet. His job is to fill in all the gaps by listing all the assets, liabilities and owner's equity. Bash is a key player in the group because he balances out the music. The assets side of Bash must equal the sum of the liabilities and owner's equity that Bash lists. An equation that is helpful in remembering what Bash does is Assets = Liabilities + Owner's Equity. This equation is called the accounting equation.

The last member of the Financial Statements is the drummer, SoFly. SoFly, which is short for Statement of Cash Flows, is responsible for making sure that everyone knows how much money came into a company and how much went out. Issy, Sore, Bash and SoFly all together make up one of the best bands in the accounting world… the Financial Statements!

Users of Financial Statements
The Financial Statements are the number one band in accounting today. Because of their popularity, they are influential to different groups of people.

Business Owners
One group of people that is influenced by the Financial Statements is business owners. Business owners learn how much money they have made, spent, and retained from the Financial Statements.

Existing Investors
The second group of people that is influenced by the Financial Statements is investors. Investors can tell how much money they are earning or losing on investments in a business just by watching the Financial Statements

Existing Creditors
Still another group of people that is influenced by the Financial Statements is creditors. Creditors can tell how well a business is operating based on the performance given by the Financial Statements.

Prospective Investors or Prospective Creditors
A combined group of potential creditors and investors are also interested in the Financial Statements. This diverse group of people looks to the Financial Statements to advise them whether or not to enter into a financial relationship with a business.

Customers
The customers are also concerned whether a business will continue to supply them with goods and services, and they can get this information from the financial statements.

Government and Government Agencies
The government is interested in the financial statements of a business to determine whether the owners are compliant with tax laws. That is determining whether the business is paying the right amount of taxes or not.

Lesson Summary
'Wow,' Kaycie thought to herself. 'It didn't take me long to get this report done! I better review it and make sure I covered everything I wanted.' She picks up her paper and begins to read it.

The first thing that she wrote about was what the Financial Statements are. The Financial Statements are a group of reports that tells a company's financial status at a certain point in time. The next thing that she wrote about was the group members of the Financial Statements. There are four members of the group: Issy, Sore, Bash and SoFly. Issy is short for Income Statement; his role in the band is to tell whether or not a business made money. Sore is short for Statement of Retained Earnings; his role is to let fans know how much, if any, money that was made was retained and reinvested in the business. Bash's (Balance Sheet) job is to list all the assets, liabilities and owner's equity of the business. SoFly is short for Statement of Cash Flows; his job is to let his fans know where money brought into a business came from and where money that went out of the business was spent.

'Looks good to me,' Kaycie says out loud. 'Tomorrow, I can tell my classmates all about the Financial Statements!'