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.

Items Included

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. 

  1. 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.

  1. 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
  1. 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