General

4 Principal Financial Statements and Their Benefits

Franklyn Ohakim Written by Sir Franklyn · 1 min read >
  1. Balance sheet (Statement of Financial Position)

The Statement of Financial Position is made of three (3) key accounts which include: Assets, Liabilities and Owners’ Equity (Investment by Owner). This could be used to determine the financial strength of a company using a ‘Balance Equation’.

The Statement of Financial Position always changes at every date.

Benefits:

  • Balance sheets determine risk and return.
  • A balance sheet succinctly lists your business’s assets and liabilities in one place.
  • This report can be used to secure business loans and other types of working capital.
  • Business balance sheets provides helpful ratios.

2. Income statement (Statement of Profit and Loss)

The Statement of Profit and Loss depicts the Accomplishments Vs Efforts (during a period) of a company. When the accomplishments (revenue) are higher than efforts (expenses) the company has recorded Profit and when the efforts are higher than the accomplishments the company has recorded Loss.

Benefits:

  • An income statement helps business owners decide whether they can generate profit by increasing revenues, by decreasing costs, or both.
  • It also shows the effectiveness of the strategies that the business set at the beginning of a financial period.
  • It can provide an overview of your cash flows
  • It allows you to identify potential competitive advantages.
  • It measures the success or failure of specific budget areas.
  • It can make your tax reporting responsibilities much easier.
  • It allows for investor analysis
  • It can be used as a tool for forecasting.

3. Cash Flow (Statement of Cash Flow)

The Statement of Cash Flow depicts all information of inflow and outflow of cash from a company. It shows a company’s cash management.

Benefits:

  • Helps the management to know:
    • how much funds are required for what purposes
    • how much cash is generated from internal sources,
    • how much cash can be procured from outside the business.
  • It helps also to prepare cash budgets.

4. Statement of Changes of Equity (Retained Earnings)

The Statement of Changes of Equity depicts the changes in Owners’ Equity of a reporting period. This shows the changes in share capital/dividends, reserves and retained earnings.

Benefits:

  • More investment value for current owners and access to the latest information about equity growth for prospective investors.
  • For investors who count on dividend payments for income that allows them to keep their shares, upward changes in equity can be a positive sign that dividends are likely to remain.
  • An increasing owner’s equity statement also indicates that a company has a strong growth potential. 
  • As a business continues to operate and collect financial data, its accountants replace estimates with actual data. They also issue adjusted statements, which are more accurate and provide a clearer look at the company’s financial status.

The above statements are very beneficial at my work place as it helps to understand the financial position of our company. With the statements, we are able to calculate operational, financial and investing activities.

#MEMBA11

References:

  1. https://www.forafinancial.com/blog/small-business/benefits-using-balance-sheet/
  2. https://www.zoho.com/books/guides/what-is-an-income-statement.html#:~:text=An%20income%20statement%20helps%20business,beginning%20of%20a%20financial%20period.
  3. https://www.yourarticlelibrary.com/accounting/cash-flow-statement/cash-flow-statement-advantages-and-limitations/65784
  4. https://pocketsense.com/advantages-change-owners-equity-statement-12076912.html

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