Financial statements are the financial dashboard of your business; they are super helpful in making smart business moves. Financial statements tell us how much we have at hand to work with, where we are going and where we are coming from.
The financial statement is a formal record of the financial activities and position of a business, person or other entity. There are four plus one types of financial statements:
- Balance sheet
- Income statement
- Cashflow statement
- Statement of changes in owner’s equity
- Notes to financial statement
The balance sheet
It is the financial statement used for decrepit all activity of the organization. It is a snapshot of your business finances as it currently stands, it tells about the assets you own and the liabilities at a particular point in time.
Balance sheets are broken up into three general categories: assets, liabilities and owner’s equity.
Assets -are anything valuable that the company owns, total assets can include things like furniture, land, buildings, notes receivables and even intangibles such as patents and goodwill.
Liabilities – are debts you owe other people such as bank loans. Total liabilities can include credit card debt, mortgages and accrued expenses such as utilities, and wages owed to employees.
Equity – the value of the company after subtracting liabilities from assets, this might be the retained revenue. Equity might also consist of private or public stock, or an initial investment from the company’s founders.
Balance sheet equation = Assets -Liabilities.
The Income statement
This is referred to as the profit and loss statement; shows how profitable a business is over an accounting period such as a month, quarter or year. It shows the revenue and expenses of the company.
Gross profit tells how profitable your products are.
Gross profit = Revenue – Cost of goods sold.
Net profit tells how profitable your business is.
Net profit = Gross profit – Operating Expenses.
Cash flow statement
It tells how much cash entered and left the business over a particular period.
These cash flows are divided into cash flows from operating activities, investing activities, and financial activities
This can be of help in predicting future cash surpluses and shortages. It also helps in having enough cash at hand to cover rent or pay other bills.
Statement of changes in owner’s equity
It measures changes in owners’ equity throughout a specific accounting period.
These notes include explanations of various activities, additional detail on some accounts, and other items as mandated by the applicable accounting framework, such as GAAP or IFRS.
- To determine the ability of a business to generate cash, sources and uses of the cash.
- To determine whether a business can pay back its debts.
- To derive the financial ratio that can indicate the condition of the business.
- To investigate details of certain business transactions.
- The basis for the annual report.
- The statement can be fraudulently manipulated.
- It can be misleading when used to project the future result of a business.
- It could be misleading to lenders.