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1.) The four major financial statements required by the SEC are the Balance Sheet, Income Statement, Statement of Stockholder Equity, and Statement of Cash Flows.
The balance sheet shows the ending balances of major classes of accounts for a specific date (Brigham, 2018, p. 233). Assets are listed first, which are things owned by the company, such as cash, inventories, and equipment (Brigham, 2018, p. 234). The second section is liabilities and equity. Liabilities include debts that are owed (Brigham, 2018, p. 236). The equity section details stock and retained earnings, reflecting ownership. The balance sheet is important to determine if a company has the resources to cover its debts (Fernando, 2022). It can also be used in ratios, like the current ratio and debt-to-equity ratio (Fernando, 2022).
The income statement contains information about a company’s performance over a period of time (Brigham, 2018, p. 237). It begins with sales, then lists deductions impacting sales, such as cost of goods sold, depreciation, and interest (Brigham, 2018, p. 238). It arrives at net income available to common stockholders, which is used to calculate earnings per share (Brigham, 2018, p. 239). The income statement helps investors understand a company’s profitability and growth potential (Loth, 2021). Several ratios use numbers from the income statement, such as profit margin and times-interest-earned (Brigham, 2018, p. 293 and 291). Many ratios use items from both the balance sheet and income statement, so it is important to use these together.
The statement of stockholder equity shows how equity changed over a reporting period (Brigham, 2018, p. 240). Net income is added to retained earnings, cash dividends paid are subtracted, and stock that has been issued or repurchased is added or removed from stock balances previously listed (Brigham, 2018, p. 240). This statement is important to see how stockholder equity changed over the period, and whether earnings are being paid to investors or reinvested into the company (Brigham, 2018, p. 240).
The statement of cash flows shows how a company used cash throughout the year (Brigham, 2018, p. 242). It is separated into sections operating, investing, and financing sections (Brigham, 2018, p. 242). This statement is important because it can help determine if the company’s activities are generating enough profit to purchase the assets it needs for growth and if there is enough cash to pay its debts (Brigham, 2018, p. 244). Our text also states the net cash from operating activities could be the most important number in the financial statements, since this statement includes both profit and working capital making it hard to hide financial problems (Brigham, 2018, p. 244).