Financial statements are a collection of high-level reports that summarise an organization’s financial performance, financial status, and cash flows. They’re useful for a variety of reasons:
- Determine a company’s ability to produce cash, as well as the sources and uses of that cash.
- To decide if a company has the financial means to repay its debts.
- To use a trend line to chart financial results to detect any looming profitability problems.
- To calculate financial ratios from financial statements that can be used to assess the health of a company.
- To look at the specifics of such business transactions as described in the statements’ disclosures.
The three Items Included in the financial statements are:
(1) An Income Statement,
(2) A Balance Sheet, and
(3) A Cash Flow Statement
How to Read Financial Statements?
You must examine and evaluate several financial statements, including balance sheets, income statements, and cash flow statements, to understand a company’s financial situation, both on its own and within its industry.
- An Income Statement
An Income statement is a financial statement that lists the sales, expenditures, and expenses incurred for a duration of time (usually a fiscal quarter or year). The simple equation on which a profit and loss statement is based on:
|Revenues – Expenses = Profit|
In basic terms, income is what a corporation “takes in,” and expenditures are what it “takes out.” Net profit or loss is the difference between sales and expenditures.
- A Balance Sheet
A balance sheet shows a company’s “book value.” It enables you to see what services are available and how they were funded as of a certain date. It displays the company’s assets, liabilities, and equity (essentially, what it owes, owns, and the amount invested by shareholders).
A balance sheet also contains information that can be used to compute return rates and assess capital structure by using the accounting equation.
|Assets = Liabilities + Owners’ Equity|
- Cash flow statement
This is the third and most significant aspect of a company’s finances. A cash flow statement aims to give a clear image of what happened to a company’s cash over a certain period of time, known as the accounting period.
It shows an organization’s ability to survive in the short and long-term depending on the amount of money flowing in and out of it.
The three parts of a cash flow statement are:
- Cash flow from operations.
- Cash flow from investment activities.
- Cash flow from financing activities.
Investors, accountants, and other business professionals daily review financial statements:
- To get an understanding of how well the company is doing and
- To analyze financial trends