Financial statements give a picture of a company’s financial health at a specific point in time, revealing details about its performance, operations, cash flow, and economic status. Shareholders rely on them to make accurate judgments regarding their stock investments, particularly when voting on corporate concerns. 

Investors and financial analysts use financial data to examine a company’s performance and forecast the future trajectory of its stock price. Investors, market analysts, and creditors use financial statements to assess a company’s financial health and profits potential. The balance sheet, income statement, and statement of cash flows are the three primary financial statement reports. 

Balance Sheet

As a snapshot in time, the balance sheet gives an overview of a company’s assets, liabilities, and shareholders’ equity. The date at the top of the balance sheet indicates when the infomation was taken, which is usually around the close of the fiscal year. 

The balance sheet shows how assets are funded, whether via obligations like debt or shareholders’ equity like retained earnings and additional paid-in capital. On the balance sheet, assets are displayed in decreasing order of liquidity. 

Liabilities are reported in the order in which they are expected to be paid. Short-term or current liabilities are obligations that are scheduled to be paid off within the year, whereas long-term or non-current liabilities are obligations that are expected to be paid off over time. 

Income Statements

In contrast to the balance sheet, the income statement spans a period of time, which is a year for annual financial statements and a quarter for quarterly financial statements. The income statement highlights revenues, expenses, net income, and earnings per share. It typically gives two to three years of data for comparing purposes. 

An income statement is one of three key financial statements used to reflect a company’s financial performance over a given accounting period. The income statement, also known as the statement of profit and loss largely focuses on a company’s revenues and costs within that time. 

After subtracting costs from sales, the statement yields a company’s profit amount known as net income. 

The Cash Flow Statement 

The cash flow statement indicates how successfully a company earns cash to pay debts, finance operational expenses, and fund investments. The cash flow statement complements the balance sheet and income statement. 

The Cash Flow Statement helps investors to understand how a company’s operations work, where its money comes from, and how it is spent. it also indicates whether or not the company is financially stable. 

A cash flow statement cannot be calculated using a formula. Instead, it has three sections that report cash flow for the various activities that a company utilizes its funds for. These three CFS components are given below. 

Operating Activities.

The Cash Flow Statement’s operating activities comprise all sources and uses of cash derived from the operation of the business and the sale of its products or services. Any changes in cash, accounts receivable, depreciation, inventory, and accounts payable are included in cash from operations. Wages, income tax payments, interest payments, rent, and cash revenues from the selling of a product or service are additional examples of these interactions. 

Investing Activities 

Investing activity encompass all sources and uses of funds from a company’s investments in it’s long-term future. This  includes the purchase or sale of an asset, loans paid to suppliers or received from consumers, and payments associated to a merger or acquisition. 

It also includes purchases of permanent assets such as property, plant, and equipment (PPE). In a nutshell, changes in equipment, assets, or investments are related to cash from investments. 

Financing Activities  

Cash from financing activities includes cash received from investors or banks, as well as cash paid to shareholders. Debt issuance, equity issuance, stock repurchases, loans, dividend payments, and debt repayments are all examples of financing operations. 

In three key business activities, the cash flow statement reconciles the income statement and the balance sheet. 

Although financial statements include a plethora of information about a company, they are not without constraints. Because the statements are susceptible to interpretation, investors often derive vastly different opinions about a company’s financial status. Some investors, for example, may appreciate stock repurchases, whilst others may like to see that money put in long-term assets. One investor may be comfortable with a company’s debt level, whilst another may be concerned about the company’s debt level. When examining financial accounts, it is critical to compare different periods to see if there are any trends, as well as to compare the company’s results to those of its counterparts in the same industry.

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