Understanding Financial Statements

Financial statements demonstrate a company’s operations. It provides details on a company’s assets, liabilities, operating costs, the efficiency of cash flow management, and the amount and source of a company’s revenue.

The Types of Financial Statements

There are three types of financial statements including:

1. The Income Statement

The income statement discloses a company’s financial performance for a specific quarter or year. The income statement allows you to see how fresh assets are brought into a company and calculates the costs incurred to generate revenue.

Profitability is determined by revenues, or the amount a business receives in exchange for the products or services it offers, fewer expenses, or all costs associated with operating the business, and taxes paid.

Starting with revenues, also referred to as the “top line,” the income statement is read from top to bottom. After deducting expenses and charges, taxes are removed. Before paying any dividends, the outcome is the company’s net income or profit, and this is where the phrase “bottom line” originates.

2. Balance Sheet

The consolidated balance sheet is a snapshot of a firm’s financial situation at a specific point in time, whereas the income statement is a record of the money coming in and out of a company over a specified time period. In other words, the balance sheet displays the assets, liabilities, and stockholders’ equity that a corporation holds as well as the difference between the two. The discrepancy stands for the stockholders’ interest in the company’s book value. Because both sides of the equation—assets equal liabilities plus stockholders’ equity—must balance, it is known as a balance sheet.

The balance sheet displays:

• Those assets’ portion was financed by debt (liability)
• The equity part (retained earnings and stock shares)
• Assets are listed in order of decreasing liquidity (in other words, assets that can be most quickly converted to cash are listed first)
• Liabilities are listed in priority order (those with the highest priority claim on a company’s assets are listed first)

3. Cash Flow Statement

The statement of cash flows depicts a company’s financial activity through time, just like an income statement does. It demonstrates where a business gets its money from and how it is invested in the future or utilized to pay for current expenses. The statement of cash flows may provide a more thorough view of a company’s liquidity (the ability to pay bills and creditors and fund future expansion) than the income statement or the balance sheet by demonstrating how a company has controlled the inflow and outflow of cash.

Benefits Of Financial Statements

The benefits of Financial Statements are listed below:

Cash flow analysis

It demonstrates the company’s financial stability and capacity to meet its obligations. The operating, investing, and financial components of the statement are separated out by the statement of cash flow.

Inventory movement and review

The opening and closing stock levels expressed as a proportion of purchases and sales, as well as changes and movements in the levels of stock throughout the course of the year, reveal the nature and capabilities of the company. It demonstrates whether products are in demand, whether they are moving quickly or slowly, whether sales trends have changed, and so forth.

Budget preparation

Every company needs a vision. The company’s aims and objectives must be clear in order to prepare a vision. By examining previously created and audited financial statements, financial statements aim to create a roadmap for the future.

Financial Statement vs Accounts Receivable

Accounts receivable are shown as a current asset on the balance sheet. The term “AR” refers to any money that clients owe for purchases they made using credit.