FINANCIAL ACCOUNTING is the system of collecting, processing, and periodically reporting a firm’s financial information; thus, its ultimate purpose is the dissemination of a firm’s financial data. This is accomplished by the publication of financial statements, all of which must be constructed in accordance with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). The more common financial statements are the INCOME STATEMENT, the statement of OWNER’S EQUITY, the BALANCE SHEET, and the statement of cash flows. The income statement measures the performance and success (or lack thereof) of a firm for a specific period of time, usually a year. When the accounting period coincides with the calendar year (January 1–December 31), the firm is said to be reporting on a calendar-year basis. If the accounting period is any other 12-month period (say, July 1–June 30), the firm is reporting on a FISCAL YEAR basis. The equation upon which the income statement is based is revenues – expenses = net income. Revenues are resources flowing into the firm from the sale of goods and/or services. Expenses, necessarily incurred in the process of earning revenue, are resources flowing out of the firm. The difference between revenues and expenses is “the bottom line”—i.e, net INCOME. Whether the firm has made a PROFIT or a loss for the period being reported, the bottom line is always labeled “net income.” The statement of owner’s (or owners’) equity illustrates the changes that occurred in owner’s equity during the accounting period being reported. Positive net income and additional investment by the owner are the primary factors that increase owner’s equity. Negative net income and withdrawals will decrease owner’s equity. The balance sheet measures the assets, liabilities, and owner’s equity of the firm at a point in time that is the last day of the accounting period. The equation on which the balance sheet is based is assets = liabilities + owner’s equity. Assets are resources owned by the firm; they are necessary for the generation of revenue. Liabilities are the firm’s debts; they are one major source of CAPITAL for the firm. Equity is the firm’s ownership and forms the other major source of capital for the firm. The right side of the balance-sheet equation represents the sources of capital; the left side, the uses of that capital. Thus, the equation must always be in balance. The format for the balance sheet is identical to the balance sheet equation: assets on the left side of the balance sheet, lia- bilities and equity on the right side. Just as the equation is always in balance, the two sides of the balance sheet are also always in balance. Important for effective liquidity management, the statement of cash flows details the cash flowing into and out of the firm for the accounting period being reported. This is not the same as an income statement. The income statement, constructed on the ACCRUAL BASIS as required by GAAP, includes more than just cash flows; it also contains accruals (such as revenues earned but not yet received and expenses incurred but not yet paid). The income statement also contains many non-cash expenses such as DEPRECIATION, DEPLETION, AMORTIZATION. The statement of cash flows makes adjustments for accruals and noncash expenses to give a true picture of a firm’s actual flows of cash. The SECURITIES AND EXCHANGE COMMISSION requires CORPORATIONs whose stocks are publicly traded to publish their financial statements at least annually. To meet this requirement, a corporation will group these financial statements and others with reports from management and the BOARD OF DIRECTORS to form the ANNUAL REPORT.