The Mathematics of Money

486

Learning Objectives

LO 1 Be familiar with the structure of income

statements and balance sheets.

LO 2 Calculate values used on these fi nancial

statements.

LO 3 Complete vertical and horizontal analyses of

fi nancial statements and use them as a tool for

interpretation.

LO 4 Calculate and interpret basic fi nancial ratios.

Chapter Outline

12.1 Income Statements

12.2 Balance Sheets

12.3 Financial Ratios

Financial

Statements

12.1 Income Statements

Former New York City mayor Ed Koch was famous for asking the public, “How’m I doing?”

For a business, “how’m I doing?” financially is obviously an important question to be able

to answer. Financial statements are reports that summarize the financial condition and

performance of a business. There are many different types of financial statements, each

designed to present certain aspects of the business’s finances. The two most widely used

types are the income statement, intended to report the business’s sales and profits, and the

balance sheet, intended to report the business’s assets and debts.

Public companies (corporations whose stock is traded on the open market) are required to

file financial statements with the U.S. Securities and Exchange Commission and send these

statements to their stockholders. Other companies typically prepare financial statements as

well, to report the company’s financial results to its owners, for internal assessment and plan-

ning purposes, or to present information about the company’s finances to current or prospec-

tive lenders or business partners. While different types of businesses may require different

details to be reported in different ways, the layout and contents of financial statements are

“The chief value of money lies in the fact

that one lives in a world in which it is

overestimated.”

—H. L. Mencken

CHAPTER

12