Beginner's Guide to Financial statements

The three financial statements that most companies include in their annual reports are the balance sheet, the income statement and the statement of cash flows.

The balance sheet also known as the statement of financial position or statement reports what the company owns(its assets), what it owes(its liabilities), and the value of stockholder’s interest(owners’ equity) at a moment in time.

The income statement also known as the statement of operations or profit and loss statement reports the money received by the company (revenues), money spent by the company (expenditures) during the reporting period.

The statement of cash flows summarizes where company funds came from and where they were used.

BALANCE SHEET

· It provides information on the financial strengths and weakness of the company.

· You can learn about the company’s ability to satisfy its creditors, mange its inventory and collect the receivables.

· You can see whether the company can easily handle the normal financial ebbs and flows of revenues and expenses, or whether it needs to bolster its cash reserves.

· You can analyze and identify trends, especially in receivables and payables that may need attention.

INCOME STATEMENT

· It provides information on revenues and expenditures. You can use the income statement to determine the operating performance of your company over a period of time.

· You can find out what areas are over or under budget.
You can identify specific items that are causing unnecessary expenditures.

· You can track increases in product returns or cost of goods sold as percentage of sales.

· You can determine income tax liability.

· Together, balance sheets and income statements provide financial information to potential lenders, such as banks, investors and vendors who are considering how much credit to grant the company.

STATEMENT OF CASH FLOWS

· It provides information on where the company acquired its money from and where the money was spent.

· You can use cash flow statements to forecast cash requirements, to identify financing needs, to locate cash drains, and to identify problems in cash budgeting process.

· It can be used to identify cash shortages and surpluses.