Financial Statements

The Income Statement

An income statement is a testimony that indicates how much income a company received over a particular time period (typically for a year or some section of a year). Additionally, an income statement also indicates the costs and expenses linked with making that revenue. Basically, the statement generally shows the firm’s net earnings or losses. Thus, it is important since it tells us how much the business received or lost over the duration.

Income statements additionally indicate earnings per share. This computation tells us the amount of money shareholders could receive if the firm resolved to share out every part of the net earnings for the time period. (Firms almost never allocate all of the earnings. Normally they plow them back in the business. Thus, the Income Statement is an extremely essential part of the Financial Statements, owing largely to the actuality that the income statement demonstrates whether a firm is profitable or not. Numerous analysts are first drawn to the income statement, taking close concentration on the revenue, profit, and expenses and making a decision on the financial state of a business based on the state of these values.

Law mandates all companies that trade publicly in most countries mandated to publish financial statements such as the income statement and others on a quarterly tendency, that is, at the end of every three-month duration and in addition on a yearly basis, that is,  at the end of the 12-month duration ending that fiscal year. The significance of a well-formed familiarity of accounting in organizing the income statement can never be understated.  At present compound business settings, the standard income statement functions is more than simply the balancing figures in the general ledger accounts, it is also used in the appliance of accounting principles (Fraser & Ormiston, 2001).

Balance sheet

A Balance sheet offers a picture of a firm’s assets, equity and liabilities at a specific point in time. This normally comprises existing assets, permanent assets, including other assets, existing liabilities, owner’s equity and long-standing liabilities. Basically, this statement demonstrates what is others owe to the business (assets), what the business owes others (liabilities), and what’s the remainder (net equity in the company). The figures change every time you obtain money or award credit to a customer in addition to when you make payment for an expense.

Operating a business devoid of using the Balance Sheet and Income statement is similar to participating in  a race without information where you are headed, and hoping that you are headed in the correct direction. Every industry, small or large, requires knowing what is going on behind the scenes.  The Balance Sheet is a tool used to test or monitor the strength of the business. Starting with the, most liquid Assets, often cash, which is characteristically what is in the bank along with petty cash, is listed earliest on a Balance Sheet. Knowing the amount of cash at hand is at all times very imperative for cash flow reasons.  Frequently, the second thing is Accounts Receivable that accounts for all the money that a company proprietor has invoiced the purchaser, but not received. When this item remains unhandled and if the figures on this account are very high, company usually will encounter cash flow problems. Additionally, the Current liabilities would mostly comprise of Accounts Payable and due in the following 12 months. This demonstrates the amounts that a firm owes to creditors. Business proprietors should at all times try to maintain their asset balance bigger than the liability figure by the assistance of a balance sheet.  A healthy business makes sure that they have a constructive Stockholder’s Equity ensuring their assets are bigger than the liabilities.

Business decisions made through the balance sheet

Line of Credit- Prospective creditors utilize the balance sheet to establish whether to give credit or the amount of credit to be extended. By analyzing the profits and losses, all creditors could resolve whether you formulate prudent financial decisions or if you have the capability of staying in business and continue earning sufficient revenue to compensate them. Creditors could also verify whether your business previously carries too many debts by evaluating the assets and liabilities.

Budget Cuts- If the business is not creating profits, you can decide the expenses to eliminate by examining the balance sheets. For instance, if there exist huge long-term liability figures, for instance loans, and additionally have a hefty amount of payroll, you might judge whether to lay off some staffs in-order to save money. The balance sheets is also consulted prior to making every large-scale purchases for the business or a decision to take additional loans to make sure that the business could afford to do so.

Liquidation Decisions- If the company is not performing well, the balance sheets list of all of the assets; therefore, you can effortlessly determine whether liquidation of any of the assets to pay off company debts is possible. If there exist a reason to liquidate a huge number of assets in-order to break even the business, you could choose to file for bankruptcy or to shutdown the business (White, Sondhi, & Fried, 1997).

Cash flow statements

The cash flow statement measures the company’s monetary health.  The cash flow statement documents the firm’s cash transactions, that is, the inflows and the outflows, all through the specific period.  It shows if revenues recorded on the income statement are actually collected.

The cash flows statement is an essential element of the financial statements of a business, particularly to the investor. The statement explains to the investor the actual amount of money made by the business.

For investors it is vital to find out the potential of a corporation to make cash. The Income statement of some businesses will indicate profits but there may be difficulties for the business in generating cash owing to inadequate cash flows. Therefore, an investor could protect his investments by making an extensive study at the cash flow statement in order to determine accurately the cash flow in the business.

Every corporation can make cash through dissimilar means and the statement of cash flows reflects this in its three parts:

Operating activities-, this statement shows much the business has through its core operating activities. For an investor it is vital as the bigger the cash flow the more benefits for the shareholders.

Investing activities-, this statement demonstrates the amount spent by the business on investments from, the capital expenditures and the monetary investments.

Financing activities

This statement shows the financing activity that is, the transactions the corporation has with its proprietors or debtors. For instance, cash proceeds, or the dividends extended to investors and shareholders.

However, the cash flow never shows all the business’s expenses.  Not every expense the business accrues is paid instantly.  Though the corporation may incur liabilities it will ultimately pay, expenses are never entered as a cash outflow unless they are paid (Peterson & Fabozzi, 2006).

References

Fraser, L. M., & Ormiston, A. (2001). Understanding financial statements. Upper Saddle River, N.J: Prentice Hall.

Peterson, D. P., & Fabozzi, F. J. (2006). Analysis of financial statements. Hoboken, N.J: Wiley.

White, G., Sondhi, A., & Fried, D. (1997). The Analysis and Use of Financial Statements.