Every company and business organization regularly issues financial statements, which give an accurate assessment of the financial health and the state of affairs of the company. These statements are analyzed by industry experts, by speculators and shareholders, and by the company itself to see how well they are handling their business and their finances.
These financial statements are issued on an annual basis, and the entire world of accounting is based on these statements. Various studies can be carried out with the help of the information published in these statements, and a number of ratios and formulas also exist to understand the state of financial affairs better. Every time money comes in or goes out from the business, it needs to be recorded somewhere, and these financial statements are a collection of all these records.
Their importance cannot be underestimated at all, and they form the basis of many advanced fields of study.
This statement shows all the assets and the liabilities of the company. It is a statement with two major columns, the right side being the assets side and the left side being the liabilities side. This statement works on the dual entry system of accountancy bookkeeping, and the total number of assets must always balance the total number of liabilities. The balance sheet of a company can be an assessment of the assets and liabilities on any single day, or during the course of an entire financial year.
Assets are broken down into several smaller categories like fixed assets, current assets, and other amounts. These are all the amounts that are due to be received by the company. On the other hand, liabilities are all the amounts that the company owes other parties. These include current liabilities, shareholder equity, and many other items. The basic concept that needs to be remembered here is Assets = Liabilities + Shareholders Equity, and that the total assets must always be equal to total liabilities.
The income statement is also known as the Profit and Loss Account, and this shows all the expenses and the incomes for a certain period of time. Most commonly, this amount of time is one quarter of a financial year, or 3 months. This statement ultimately shows the amount of profit that has been enjoyed over a time period, or the amount of loss that has been incurred. Going by the results, the company can judge how well it is operating, and it can then decide what its next step of action is going to be.
Some of the most common figures that can be found from the income statement are Earnings Per Share (EPS), and income before taxes and other deductions. First the gross profit is calculated, and then finally the amount of net profit is arrived at. Other factors like cost of sales, depreciation and discounts are also taken into consideration here. Observers can study the income statement of a company and see how profitable their business is.
Cash Flow Statement
This statement gives a report of the total amount of cash that comes into the business, and the amount of cash that goes out. It may sound similar to the income statement, but the purpose of cash flow statement analysis is different. The income statement is used to calculate net profit, while the cash flow statement is used to find out how much cash is actually available. Situations like depreciation, accounts payable and accounts receivable affect the cash amount, but cannot be seen physically. Hence, the need for the cash flow statement is real and essential.
The cash flow statement takes operating activities, investing activities and financing activities into account before giving an assessment about how much cash the company has actually generated. This gives the company the opportunity to decide how much cash to spend on expenses. The financial statements play a big role to aid the policy makers and financial decision makers in the company itself.
It is mandatory for every business to maintain and publish these statements, because no company can operate under a veil of secrecy, especially if there are shareholders involved. After all, it is the money of these shareholders that works towards running the business.