Accounting For Dummies®, 4th Edition

Chapter 2. Financial Statements and Accounting Standards

In This Chapter

• Fleshing out the three key financial statements

• Noting the difference between profit and cash flow

• Finding answers in the financial statements

• Knowing who sets accounting standards

If you read Chapter 1, you got a very brief introduction to the three primary business financial statements: the income statement, the balance sheet, and the statement of cash flows. In this chapter, you get some juicy details. Then, in Part II, you really get the goods. Think back to when you learned to ride a bicycle. Chapter 1 is like getting on the bike and learning to keep your balance. In this chapter, you put on your training wheels and start riding. Then, when you're ready, the chapters in Part II explain all 21 gears of the financial statements bicycle, and then some.

The financial effects of making profit are not as simple as you may think. Profit-making activities cause changes in the financial condition of a business — but maybe not the changes you suppose. Many people assume that making a profit increases a business's cash balance by the same amount and that's the end of it. That's simply not true. Making profit leaves many footprints on the financial condition of a business.

Also in this chapter, I briefly discuss financial accounting and reporting standards. Businesses comply with established rules for recording revenue, income, expenses, and losses; for putting values on assets and liabilities; and for presenting and ...