There
are four basic financial statements which business/companies use in
order to keep track of profits, expenses, as well as other financial
obligations. Financial statements are key in revealing the financial
health of an organization/establishment.
Financial information can get complicated, which is why investors,
owners, as well as management need to understand how to read and
interpret financial statements. An income statement, balance sheet,
cash flow statement and statement of shareholders’ equity are the
four basic financial statements, which businesses use in order to
keep track of a company’s financial activities.. Understanding the
elements of these statements and how they relate to one another help
an owner/management understand a company’s financial position; more
importantly, these statements aid management in making proper
decisions about an organization and its future.
The
four basic financial statements:
Income
Statements
Income
statements determine the profit/loss of a particular
organization/company. A company's revenue, expenses, gains, and
losses are all listed on a company's income statement. The revenue of
an organization refers to the money earned from a company’s normal
business operations. The expenses on an income statement illustrate
the costs needed in order to earn a profit (revenue); in addition,
when a company sells an asset, it either makes a gain, or takes a
loss.
An
investor is able to use this statement to get a quick overview of
where a company is financially at the current time. Questions such as
how much money has been made during a given month, expenses paid for
a given month, as well as losses for any given period of time are all
available using these statements.
Balance
Sheet
A
company's balance sheet refers to the elements of the accounting
equation (assets = liabilities + shareholders’ equity). A balance
sheet provides insight into the financial status of an
organization/company for a particular time; differing from other
statements, which provide information over a broader period of time.
Assets
on a balance sheet are classified as current or fixed assets, in
reference to a particular company. Current assets are the most
liquid, meaning these assets easily convert to usable cash. Fixed
assets are long-termed assets. Similar to assets, liabilities are
also classified as current or long-term.
Investors
are able to use this statement to see where a business may be
financially. Questions such as how much help is needed, how far
behind in profits a company is, how much profit is needed in order to
turn a profit, as well as how close a company is to turning the
corner and creating a profit are all answered by this statement.
Cash
Flow Statement
Cash
flow statements
illustrate
where an organization uses its money, for instance how much a company
may spend on operating costs, investment activities, and/or financing
activities are all on their cash flow statement; cash
flow statements show the amount of cash within a company. The first
section of a cash flow statement is operating activities, showing the
cash flowing in and out of the company in relationship to regular
business operations; the operating activities section would include
net income.
The
third section, investing activities, shows how much an organization
spent, as well as profited on an investment.
Statement of Shareholders’ Equity
The
statement of share holder's equity statement, refers to changes in
the title rights of equities in an organization. These types of
statements shows changes in a shareholders’ equity account.
This
statement may be the most helpful to an investor/investors. This
statement illustrates what is done with the money coming in; how much
expenses are, including payroll, advertising, licenses, insurance,
rent. An investor can get the complete financial structure of a
company and where changes need to be made in order to help an
organization become successful, by using this statement.
Financial
statements arr very important to understanding, the potential
advancement, and expansion of a company. Knowing and understanding
available assets and cash is also important when dealing with the
current status of an organization. In addition, these numbers are
also important when selling an establishments as well as impressing
potential investors, in order to help a company expand.
Financial
statements show the financial performance of an
organization/establishment.. the four basic statements are used for
both internal and external purposes. Theses statements, when used
internally, aids management as well as employees understand the
current state of an establishment/franchise. Owners/managers use it
to plan for the future, more importantly, they use it to set goals
for the future and advancement of the business.
In
business, the most important thing is keeping the doors open. Using
financial statements aid owners in making the proper decisions, in
order to maintain a set standard for an establishment.
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