any has a net income; otherwise, there is a net loss. Mathematics is used to calculate each of the items on the income statement, although it does not determine which items appear on the statement. That is left to the accountant and to accounting standards. Executives in an organization also have an input as to which items appear on the income statement through the decisions they make when determining how to finance operations. For example, a company might be able to save on labor costs (cost of goods sold) if it moves manufacturing to a foreign country. However, political instability in that country may make this a high risk operation. It is the manager's intuition and experience which comes into play in determining whether or not to make the move; this decision directly affects, but is not reflected in, the income statement (Lorenz, 1994, p. 20).
The balance sheet states the financial condition of the company at a specific point in time. It is called a balance sheet because a company's assets are equal to its liabilities plus its equity. This fundamental mathematical equation is the core of every business valuation. On the balance sheet, assets are listed on the left, and liabilities and equity are listed on the right. The two figures always match. As with the income statement, mathematics is used to calculate the value of the items appearing on the balance sheet, but it is not used to determine what those items are. Prepaid insurance, pension expenses and other complicated items rely on mathematical calculations for results.
As with the income statement, decisions made within the organization affect the balance sheet, but may not be reflected on. Off-balance sheet item financing, for example, is one way that companies can bring additional capital into the organization without necessarily affecting their financial statements. The risk associated with this is weighed by the decision maker against the quantitative da...