Demystify financial statements. Learn about income statements, balance sheets, and cash flow statements to make financial decisions.
Do you want to perform an investment analysis to assess the business results, or are you just interested in a company? It is important to be familiar with the features of financial statements, including do’s and don’ts, to make decisions and assess the result of the corporation’s activity. However, it becomes complicated with all the numbers, terms, and concepts.
You will learn the fundamentals of financial statements, like income statements, balance sheets, cash flow statements, and annual reports. Also, explore the key roles played by accounting rules and regulations. So, let us begin exploring those numbers and making sense of them.
A financial statement represents a business organization, institution, or an individual’s financial operations or state of affairs. It shows a company’s activities, economic operations, and balance sheet for a certain period. Financial statements are relied upon by a company’s lenders, investors, executives, and government in deciding on a business entity’s financial position and profitability. These are usually prepared in the last month, quarter, or year.
A financial statement is a general term that covers more than one kind of report. Different types give information about a company and how it manages its funds.
A balance sheet is an equation of financial condition. The accountants employ statements to present the transactions concerning the organizational assets, liabilities, and owner’s private equity. It differs from other standard financial reports because while all the latter give information for a period, the balance sheet provides information at a certain date.
The assets come first and depict what the company owns. Students must always group assets based on their liquidity and how easily an asset is converted into cash. The balance sheet will begin with current assets, converted to cash within one year, and may include cash, investments, and accounts receivables. Fixed or long-term assets include furniture, buildings, and land. Assets on the balance sheet of non-profit organizations can also be grouped based on whether or not the donors restrict them.
After this, there are the liabilities that show what entity is owed. The current liabilities are accounts payable, wages, and unearned profit due next year. However, long-term liabilities are mortgages further listed on the balance sheet. The remaining balance of assets and liabilities is owner’s equity. It shows the company’s worth. In the financial statement, the total assets and liabilities should be equal.
In the case of non-profit organizations, there may also be specified limitations concerning some equities.
It is also known as the statement of operation or Statement of Financial Performance. This income statement presents a company’s financial performance in a fiscal period – the usual period used maybe a quarter or a year. The income statement speaks about two main things:
· Revenue
Sales revenue is the total amount from the service or product sold in a given period.
· Expenses
Costs refer to all the expenditures made in earning the revenues – salaries, rents, utilities, etc., and the cost of the goods sold. The profit means the amount of net income or net loss if the given revenue minus expense is negative.
Result = Sales – cost (Profit or Loss)
The cash flow statement presents information about cash at a specific period. This is because it indicates the amount of” working capital,” or the amount of money utilized in the business during the period in question. They divide cash transactions into operational, private equity investment, and financing activities.
The operating section in the cash flow statement deals with frequent cash inflow and outflows, such as revenue and wage expenses. The investing portion captures cash flow for activities like equipment. The financing part illustrates stock, shares, and debt activity. This report is valuable to any business, particularly non-profits, as it can indicate how the donations have been spent.
Annual statements of financial position contain valuable information that helps to assess a firm’s economic situation. These statements enable balance, reconcile, and explain profitability, liquid assets, and the firm’s stability, as presented by the balance sheet, income statement, and cash flow statement. Maintaining interest in the three main financial statements is a good start in developing the right knowledge base for a financial newbie. Once you can read and understand those documents in a particular way, the chances of making good decisions, whether running a business investing or gaining knowledge in finance, will increase.
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