General

FINANCIAL STATEMENTS: THE BASICS

Adesola Pitan Written by Adesola Pitan · 1 min read >

Financial Statements are documented records that provide information about the business activities and the financial performance of an organization. Financial Statements provide an overview of how much a business had expended over the course of the year, what it has at hand and where it intends to be, hence, they can be used for making smart business decisions. Financial Statements are usually audited by agencies of government annually to ensure accuracy and for tax, investing and financing purposes.

We have four different types of Financial Statements listed as follows:

  • Income Statement
  • Balance Sheet
  • Statement of Cash Flows
  • Statement of Changes in Owner’s Equity
  • Notes to Financial Statement

Income Statement: This is also known as the profit and loss statement and shows how profitable an organization is over an accounting period which could be a month, quarter or year. It provides information on the revenue and expenses of the organization.

Gross profit provides us information on how profitable the organization’s products or services are

Gross profit equals Revenue minus Cost of goods sold.

Net profit provides information on how profitable the organization is.

Net profit equals Gross profit minus Operating Expenses.

Balance Sheet: This is the financial statement that provides information on the organization’s assets (resources) as well as equity and liabilities or debt. This information provides a snapshot of the company’s finances as it currently stands, thus, showing the company’s ability to fund its operations either near term or future.  Balance sheets are made up of three general categories: assets, liabilities and owner’s equity.

Assets: These are valuable items that the company owns and can include things like furniture, land, buildings, notes receivables and even intangibles such as patents and goodwill.

Liabilities: These are the debts the company owes other people or entities such as bank loans. Total liabilities can include credit card debt, mortgages and accrued expenses such as utilities as well as employee wages.

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 equals Assets minus Liabilities.

Statement of Cashflows: This provides information of volume of cash and cash equivalents that passed through the organization (inflows or outflows) over a given period. For any organization, cash flows can be from operating activities, investing activities or financial activities. Statement of cash flows can be used in predicting future cash surpluses or shortages. It also helps in having enough cash at hand to cover rent or pay other bills.

Statement of changes in owner’s equity: This provides information on changes in owners’ equity throughout a specific accounting period, from the opening balance to the end of period balance.

Notes to Financial Statements: These notes provide information on the detailed assumptions made while preparing all the Financial Statements mentioned above (Income Statement, Balance Sheet, Statement of Cash Flows and Statement of Changes in Owner’s Equity). The notes usually include explanations of various activities, additional information on accounts and other items as mandated by the applicable accounting frameworks.

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