The main goal of financial statements is to give information about an organization’s financial situation, operating outcomes, and cash flow. Readers of financial accounts use this data to make decisions about how to allocate resources. Each of the financial statements serves a certain function at a more in-depth level. The reader can learn about a company’s ability to turn a profit from the income statement. Depending on how expense data is compiled, it also makes the amount of sales and the characteristics of different types of expenses known. The income statement can be used to analyse trends in the performance of business operations when examined across a number of time periods.
Financial Statements: What Are They?
Financial statements are official records of a company’s financial activity, either at a certain point in time or over an extended period of time. Companies are mandated by the SEC to create and publish these statements in order to provide investors with transparency regarding the company’s financials. The income statement, balance sheet, and cash flow statement are the three main financial statements. Quarterly financial statements are released by publicly traded firms.
What Are the Uses of Financial Statements?
Management, governmental organisations, investors, creditors, and even rival businesses can assess a company’s financial standing using its financial statements. The parties indicated above frequently compare results to previous reporting periods, to peers in the industry, to debt convenents, and other factors when analysing financial statement data.
The Top Three Financial Statements Used
The following three financial statements:
Balance Sheet, Income Statement, and Cash Flow Statement
Investors can track net income, which is the “bottom line” of the income statement, to observe how the financial statements are connected. The balance sheet’s retained earnings are then increased by net income, and net income is the top line item in the statement of cash flows’s part devoted to the cash flows from operational activities.
Revenue Statement
The income statement, often known as a profit and loss statement, summarises a company’s revenues, costs, and earnings for a given time period, typically a quarter or fiscal year.
What Information is Shown on an Income Statement?
Revenue: Sales revenue as well as any additional money from the sale of assets, lawsuit settlements, royalties, milestone payments, or other sources make up revenue.
Expenses: Cost of goods sold, operational overhead, salaries, supplier payments, sales commissions, depreciation, legal fees, and taxes are some examples of expense categories.
Gross Income: often known as gross profit, is the amount of money that a business makes after deducting the actual costs associated with producing and dispensing its goods or services. The cost of goods sold, or COGS, is subtracted from the total sales of a business to determine gross income.
Operating Income: Also known as operating profit, operating income is calculated by deducting additional operating expenses like utilities, rent, and salaries from gross profit.
Financial Statements
A company’s assets, liabilities, and shareholders’ equity are all listed on the balance sheet at one time. It can be used to assess a company’s working capital, assets, and the proportion of debt against equity in its capitalization.
What Comes With It?
Assets: May include things like tangible personal property, liquid cash, marketable securities, equipment, pre-paid taxes and costs, inventories, and more. Intangibles like patents, trademarks, and other intellectual property are also considered assets.
Liabilities: A company’s liabilities can include whatever it owes to another party, such as overdue payroll expenses, unpaid rent, debt obligations, accounts payable, unpaid taxes, court judgements, or bonds owed.
Net Worth: The value of a company’s net worth is calculated by deducting its obligations from its assets. A company’s net worth, also known as shareholders’ equity or shareholder’s equity, is the amount that would remain after all liabilities and assets have been paid for by the corporation.
Payables Statement
The cash coming into and going out of the business is tracked in the cash flow statement. shows the cash effects of sales, expenses, capital investments, financing, and other factors. It covers three company activity categories, including operations, investments, and financing.
What Comes With It?
Operations Cash Flows: brings back depreciation, amortisation, deferred income taxes, along with other prepaid things, since these items weren’t a use of cash, and starts with net income (total revenues minus total expenses). Any increases in inventory and accounts receivable are deducted since they are assets that hold back cash, but growth in accounts payable and deferred revenue are added to the balance.
Cash Flows from Investing: This category includes capital investments made in a subsidiary or joint venture, as well as cash outlays for manufacturing facilities, expensive machinery, and other real estate. The Cash Flows from investing segment also accounts for divestitures. The greater the drain on overall cash flow over the measuring period, the higher the capital expenditure.
Cash flow from Financing: Dividend payments, new stock or bond issuances, stock and bond repurchases, and other cash flows related to financing are all included. Investors can see in this part a summary of the company’s history.
Worth Readings
What is Book Keeping?
A Payroll Management System is What?
Audit and Assurance
Why Outsourced CFO Services are Essential for Small Businesses
