Basic Understanding of Financial Statements

There are four primary financial statements: balance sheets, income statements, cash flow statements and shareholder’s equity. Financial statements show the financial condition of an entity at a given time. This discussion will only include the balance sheet and income statement.

A balance sheet provides detailed information about a company’s assets, liabilities and shareholder’s equity. Assets are shown at the top of the statement and the liabilities and equity are shown at the bottom. Assets equal the liabilities and equity. Assets are things a company owns such as cash, accounts receivables, inventory, equipment, trucks, plants, land and other things that have value such as trademarks and patents. Assets are listed as current and noncurrent. Along with cash, items that are expected to be converted to cash within one year such as receivables and inventory are considered current assets. Noncurrent items are assets the company does not expect to convert to cash within a year or sell and include items that are used to operate the business like equipment, furniture, vehicles and plant.

Liabilities are listed according to their due dates. Liabilities expected to be paid within one year are considered current and those expected to be paid longer than a year are considered long-term. Examples of current liabilities are accounts payable and the portion of debt that is payable in the next twelve months. Shareholder’s equity includes both the original investment of the shareholders plus or minus the company’s earnings or losses since inception. Companies often distribute earnings as dividends instead of retaining them in the company as retained earnings.

An income statement shows the amount of revenue a company earned over a given time period and the costs and expenses associated with earning that revenue. The top line of the income statement, called gross revenue, is the total amount of money brought in from sales of products and services. This is gross revenue because no expenses have been deducted. Next returned items and discounts or allowances are deducted to leave net income. The next item deducted from net income usually is the costs of goods sold. This is the amount of money expended by the company to produce the goods and services that were sold leaving a subtotal called gross profit. It is called gross profit because there is other expenses that have not yet been deducted called operating expenses. These expenses go toward supporting a company’s operations and are not directly linked to the production of the product or services being sold and include items of expense such as salaries for administrative personnel, marketing, research and depreciation. Operating profit before interest and income taxes are arrived at after deducting all operating expenses from gross profit. This is usually called income from operations. Next you must add any interest income and deduct any interest expense to arrive at operating profit before income taxes. If there is operating profit before income tax than income taxes must be deducted to arrive at net profit or net loss.


Ray Highsmith is the President of Barhorst Insurance Group, LTD., the largest Nationwide Agency in the nation. He has been in the insurance business since 1997 after successful careers in Construction and Real Estate employed in various positions ranging from controller to Vice President of Finance and Accounting. Ray graduated from Texas State University in 1964 with a major in accounting and presently resides in Jersey Village, TX with his wife Brenda with whom he has been married for 45 years.

Home Resources Tools Services Forum About Us Contact Us

The Game Plan website is not sponsored by or associated
with Nationwide Mutual Insurance Company or any of its affiliated companies.