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Chapter 2: Introduction to Financial Statements

Chapter Introduction​

Three months have passed since Marie opened Le Petit Bistro, and her accountant, Monsieur Schneider, has prepared her first set of financial statements. As Marie looks at the documents spread across her kitchen table, she feels overwhelmed. There's a Balance Sheet (Bilan), an Income Statement (Compte de RĂ©sultat), and pages of notes. "What do all these numbers mean?" she wonders. "Is my restaurant actually making money? How much cash do I have? Can I afford to hire that second cook I've been thinking about?"

Monsieur Schneider explains that these financial statements tell the story of her business. The Income Statement shows whether she's profitable. The Balance Sheet shows what she owns and owes. Together, they answer her questions and provide the information she needs to make informed decisions.

In Luxembourg, financial statements are not just helpful—they're legally required. All businesses must prepare annual accounts (comptes annuels) according to the Plan Comptable Normalisé (PCN) and file them with the Registre de Commerce et des Sociétés (RCS). But beyond compliance, understanding financial statements is essential for any business owner who wants to succeed.

This chapter introduces you to the four primary financial statements: the Income Statement, Statement of Owner's Equity, Balance Sheet, and Statement of Cash Flows. You'll learn what each statement shows, how they connect to each other, and how to prepare them according to Luxembourg's PCN standards. You'll also discover how different legal entity forms in Luxembourg (SA, SARL, SNC, etc.) affect financial statement presentation.

By the end of this chapter, you'll be able to read and understand financial statements, prepare basic statements yourself, and use this information to make better business decisions—just like Marie will learn to do for her restaurant.

Why It Matters​

Financial statements are the foundation of business communication. They provide a standardized way to report a business's financial position and performance. In Luxembourg, where businesses range from small family-owned shops to international corporations, financial statements serve multiple critical purposes:

  • Legal Compliance: All businesses must prepare and file annual accounts with RCS
  • Tax Reporting: Financial statements form the basis for corporate income tax and VAT calculations
  • Business Decision-Making: Owners use financial statements to assess profitability, manage cash flow, and plan for growth
  • Stakeholder Communication: Investors, creditors, and other stakeholders rely on financial statements to evaluate businesses
  • Regulatory Oversight: Government agencies use financial statements to ensure compliance and protect the public

Understanding financial statements is not just for accountants. Business owners, managers, investors, and anyone involved in business needs this knowledge. In Luxembourg's business environment, where transparency and compliance are essential, financial statement literacy is a fundamental skill.

Learning Objectives​

By the end of this chapter, you should be able to:

  1. Describe the Income Statement, Statement of Owner's Equity, Balance Sheet, and Statement of Cash Flows, and explain how they interrelate
  2. Define, explain, and provide examples of current and noncurrent assets, current and noncurrent liabilities, equity, revenues, and expenses
  3. Prepare an Income Statement, Statement of Owner's Equity, and Balance Sheet
  4. Understand Luxembourg PCN Account Classifications (Classes 1-7) and how they relate to financial statements
  5. Explain Luxembourg legal entity forms (SA, SARL, SNC, SCS, etc.) and their accounting implications