why is the statement of shareholders\' equity important in order to understand t

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Small Business > Finances & Taxes > Financial Statements The Basic Features of the Four Financial Statements & Their Interrelationships by Rose Johnson , Demand Media Related Articles What Are the Four Financial Statements That Must Be Prepared for a Business Entity? What Are the Four Financial Statements Typically Produced by a Company? The Four Primary Financial Statements That Companies Use The Difference Between the Four Financial Statements The Three Main Business Activities Measured by Financial Statements Why it Is Important for Small Business Managers to Constantly Analyze Their Financial Statements? Financial statements are key components in revealing the financial health of an organization. A company's financial information can get quite complicated, but business owners and investors should understand the basics of how to read financial statements. Most businesses produce four major financial statements, including the income statement, balance sheet, cash flow statement and statement of shareholders’ equity. Understanding the elements of these statements and how they relate to one another can help you understand a company’s financial position and make good decisions in relation to the organization. Sponsored Link Financial Modeling Course Forecast IS,CF,Balance Sheet, DCF Real Estate, Cement, IT Modelingwww.educorporatebridge.com Income Statement A firm's revenues, gains, expenses and losses are listed on the income statement. Revenue is money earned from a company’s normal business operations. The expenses on the income statement are the costs associated with earning the revenue. When a company sells one of its assets, it can experience a capital gain or loss. Revenues minus expenses, plus gains minus losses, equal net income or net loss. The dollar amount of net income listed on the income statement is also found on the cash flow statement under the operating activities section. Balance Sheet The balance sheet includes the elements of the accounting equation: assets equal liabilities plus shareholders’ equity. The assets on a balance sheet are classified as either current or fixed assets. Current assets are the most liquid, meaning they easily convert to cash. Fixed assets are long-termed assets. Similar to assets, liabilities are also classified as current or long-term. Current liabilities include money owed to creditors in less than a year. Long-term liabilities are due in one year or later. Shareholders’ equity is the total amount of equity in the firm. The shareholders’ equity section of the balance sheet is explained in further detail on the statement of shareholders’ equity. Cash Flow Statement The cash flow statement shows the amount of cash within a company. Items that affect the cash balance are listed on the statement. The first section of the cash flow statement is operating activities, which shows the cash flowing in and out of the company in relation to its business operation. The operating activities section also includes net income and the change in dollars of certain accounts listed on the balance sheet. The next section, investing activities, shows cash the company received and spent on a company's capital investments. The financing activities section shows the inflows and outflows of cash related to the company’s issued financial securities, which is also listed on the balance sheet and statement of shareholders' equity. Statement of Shareholders’ Equity This statement shows the changes in the shareholders’ equity account. The first line item is the beginning balance for common stock. The amount of newly issued common stock is added to the beginning balance to get the ending balance. The same goes for preferred stocks. Listed next is the beginning balance to retained earnings, which is also listed on the balance sheet. The net income listed on the income statement is added to the beginning retained earnings balance and the amount of dividends paid out to shareholders is subtracted to get the ending balance. The ending balance for common and preferred stock and the ending balance for retained earnings is added together to get the total of the shareholders’ equity.

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