Chapter3 Financial statements, Cash Flow, and Taxes
3-1 Financial statements and Reports 1. The annual report is the most important report that corporations issue to stockholders, and it contains two types of information. (1) First, there is a verbal section, often presented as a letter from the chairperson, which describes the firm’s operating results during the past year and discusses new developments that will affect future operations. (2) Second, the report provides these four basic financial statements: i. The balance sheet, which shows what assets the company owns and who has claims on those assets as of a given date. ii. The income statement, which shows the firm’s sales and costs (and thus profits) during some past period. iii. The statement of cash flows, which shows how much cash the firm began the year with, how much cash it ended up with, and what it did to increase or decrease its cash. iv. The statement of stockholders’ equity, which shows the amount of equity the stockholders had at the start of the year, the items that increased or decreased equity, and the equity at the end of the year. 2. In any event, the information contained in the annual report can be used to help forecast future earnings and dividends; therefore, investors are very interested in this report.
3-2 The Balance Sheet 1. The balance sheet is a “snapshot” of a firm’s position at a specific point in time.

* * Stockholders’ equity can be thought of in two ways. * First, it is the amount that stockholders paid to the company when they bought shares the company sold to raise capital, in addition to all of the earnings the company has retained over the years.The retained earnings are not just the earnings retained in the latest year-they are the cumulative total of all of the earnings the company ahs earned during its life. *