Everything To Know About Financial Statements
Numbers mean everything to a company these days. Just knowing how to study and work a financial statement is a task in itself. These statements provide a report on your company’s financial health.
Whether you are an analyst or just an investor, you must know the basics of financial statements. So, here is everything you need to know about financial statements.
- 1 What should be included in a financial statement?
- 2 Different types of financial statements
- 3 What are financial statements used for?
What should be included in a financial statement?
Writing a financial report generally comes to the complicated side of things. They should be written in a format generally accepted by the account principles of that country. If you have a problem in writing financial statements or just figuring out what type of statement to write, you can take a look at these 9 examples of financial reports. Here are some crucial things you should remember to include in your financial statement:
Assets, exactly as they sound, are anything that has a financial value. It can be anything from cars to physical goods to cryptocurrency. Assets are something that ensures bringing a profit to the company in the future.
The change in net assets during a certain period is due to investments or distribution by owners.
Distribution to owners
This is a term for a decrease in net assets or equity due to incurring liabilities to owners or transferring assets, or rendering services.
The interest remaining in assets after removing liabilities from them.
Amount of money a company spends on in the time period of producing and delivering goods.
An increase in net assets or profit due to business transactions by the company is called gains.
Investment by owners
Increase in net assets by transferring assets from.
Some sacrifices that the company will have to make due to previous transactions or services.
The total decrease in equity after all the business transactions and other events.
Enhancement of assets and settlement of liabilities in the period of central operation of a company is known as revenues.
Different types of financial statements
There are mainly 3 types of financial statements:
The balance sheet takes into action the following relation:
Assets= Liabilities + owner’s equity
A balance sheet must follow this relation and balance it out. If it doesn’t, it’s simply incorrect. It provides information about what are the company’s assets, what liabilities it holds, and the funds given by its shareholders.
Profit and loss statement
A profit and loss statement, also known as an income statement, tells you about how much profit you’ll be making. It follows the following formula:
Profit or Loss= Revenue – Expense
The head revenue consists of two entries: revenue from work and other types of income. Expense covers every expenditure from employment costs to raw materials, etc.
Cash flow statement
Cash flow statements, as the name suggests, visualize the in and outgoing of cash from the company. These statements are as close as you will get to a company’s true financial health. You may be able to wrongly state profits through unfair means; you can’t lie when it comes to the flow of hard cash.
The statement consists of three major parts: cash flow from financing activities, cash flow from operating activities, and the company’s investing activities.
If money flow from operating activities is positive, then it means that your company is earning money from its work. If it is negative, then your company is losing money. Financing cash flow reveals the cash raised for the company’s operations or money that was used for payment of debt. Investing cash flow covers the cash used for various investments.
What are financial statements used for?
Financial statements are a kind of scorecard for a company. With the rise in the number of investors in both mutual funds and stock trade, it becomes crucial to analyze companies you are investing in. Financial statements let you judge a company on the basis of the balance sheets, solid earnings, and positive cash flows.
Different types of financial statements are used for different things:
An income statement provides information about the ability of a company to make a profit. It also reveals the volume of sails and where the company spends its money. Analysts also use these statements to figure out different trends in companies’ finances.
The balance sheet’s main role is to explain the current status of the business. This information is then used to calculate the debt on the company, funding, liquidity, and other useful facts.
Statement of cash flows
These statements define the nature of cash receipts and cash distributions. This information can be very useful when compared with the income statement as these do not always match with sales and expenses mentioned in the latter.
Financial statements are not limited to these uses only. They also give crucial information about credit decisions, investment decisions, taxation decisions, and union bargaining decisions.