Understanding financial statements is essential to the success of any business. In addition, financial statements can be invaluable for investors and other ventures for individuals. They can be used as a roadmap to guide you in the right direction and help you avoid costly errors. Financial statements have a value in excess of preparing tax returns or applying for loans.
Financial statements are comprised of three main statements:
- The Income Statement (or Profit & Loss): This statement reports the earnings of a business by stating all
relevant income and all expenses incurred to generate that income for a particular period of time. This may be
annually, quarterly, or monthly or all three depending on the company’s requirements. This may also be as
frequent as weekly or daily if the company feels the information is critical.
- The Balance Sheet (or Statement of Financial Position): This statement reports the financial position of a
company or individual at a particular point in time. It allows someone, such as a creditor or vendor, to see what a
company owns as well as what it owes to other parties as of a particular point in time and can influence whether
the company qualifies for additional credit or loans.
- The Statement of Cash Flows: The cash flow statement reports the cash generated and used during a specific
period of time. The cash flow statement organizes and reports cash generated and used in the following
Operating Activities which converts items reported on the income statement from the accrual basis of
accounting to cash.
Investing Activities which reports the purchase and sale of long-term investments and property, plant
Financing Activities which reports the issuance and repurchase of company owned bonds, stock,
payment of dividents, and loans.
Each of these individual statements are essential for analyzing and projecting the future profitability and stability of the company. Each of these statements may also contain supplemental information relating specifically to that statement.