THE BALANCE SHEET, INCOME STATEMENT,
AND STATEMENT OF CHANGES IN
The purpose of financial accounting is to provide information about the firm to outsiders,
particularly to investors and creditors.
Companies convey information about their
economic status and their economic accomplishments during the past year (or quarter) by
publishing accounting reports that contain the balance sheet, the income statement, the
statement of changes in stockholders’ equity, and the cash flow statement.
In this chapter
we describe the first three statements; the cash flow statement is addressed in chapter 5.
Building on the elements defined in chapter 1, we construct these statements by
explaining the line items within them.
Businesses fall into three broad categories: service companies, merchandisers, and
, as the name implies, provide services to customers.
Accountants, hair stylists, entertainers, lawyers, and sports teams are examples of service
buy goods from distributors and wholesalers and resell them.
Clothing stores, gas stations, grocery stores, shoe stores, and sporting goods stores are
make the goods and sell them, and include auto makers,
home builders, and makers of photographic instruments and materials.
among these businesses lead to differences in the asset section of the balance sheet and
the income statement.
One may also categorize firms by their organization.
unincorporated business with a single owner.
is an unincorporated
business with more than one owner.
is a business entity licensed by a
state government, and it receives various rights and responsibilities.