Financial Statements and Types of Financial Statements

Financial statements state the financial information of the company. By analyzing these statements, we can make inferences about the health of the business. Government agencies and accountants frequently audit these statements to ensure it is accurate for taxation and financing purposes. The primary purpose of these statements is to determine if the business can generate cash and pay back its debts. Companies can also use these statements as an annual report, which is shared with their investors and the investment community. The types of financial statements are:

•       Profit and loss statement
•       Balance sheet
•       Cash flow statement

Profit and Loss Statement

The first thing that an investor or analyst would like to look into is the P&L statement of the company. The P&L statement shows the business’s financial health over a specified period of time. It is usually for a quarter or a year. To find the gross profit, the cost of goods sold is subtracted from the sales revenue. The deduction of the cost of goods sold from revenue shows the profitability of the products. After that, net profit is calculated by deducting other operating expenses and adding other incomes. Having profitable products doesn’t always mean that the business is also profitable. Net profit shows the profitability of the business. 

Types of Revenue

The revenue earned by a company through the sales of its products and services is known as operating revenue. This type of revenue comes from the core business activities of a company. The operating revenue for a popsicle company would come from the sale of popsicles.

The income earned from the non-core activities is known as non-operating revenue. This revenue falls in the secondary functions of the business. Some non-operating revenue includes:

•       Interest earned from cash in the bank
•       Rent from property
•       Income from renting company’s property for displaying advertisement

The revenue generated from other activities is termed as other income. These include profits earned by selling long-term assets like land and vehicles.

Types of Expenses

The expenses incurred through the process of earning revenue from the prime activities of the business are the primary expenses. These include Cost of goods sold, General and administrative expenses, wages paid to the employees, commission paid on sales, payment for electricity and transportation.

Balance Sheet

The balance sheet demonstrates a company’s assets, liabilities, and stockholder’s equity at a specific point in time. It is a summary of the business’s financial health. The date on which the balance sheet has been made is written on the top. Generally, a balance sheet is made at the end of the fiscal year; however, this is not always the case. The components of the balance sheet are:

Assets

• Assets like cash and cash equivalents.

• Account receivables are those amounts the customer owes to the company. 

• Inventory.

Liability

• Short-term and long-term debt.

• Wages payable to the employee.

• Dividends payable.

Shareholder’s Fund

A company’s total assets minus total liabilities is the shareholder’s fund. It is the amount that would be used to pay off the shareholders by liquidating all the assets and paying off all the company’s debt. A part of the shareholder’s fund is the retained earnings that are not given to the shareholders of the company as dividends.

Cash Flow statement

A cash flow measures the change in cash flows over a particular period of time. It shows the flow of cash into or out of business. It uses net income and modifies it for any non-cash expenses. It shows pure cash activities, and for a period of time, it shows the net cash change from beginning to end. It is prepared for companies that use the accrual accounting method. It has mainly three parts:

• Cash Flows from Operations

• Cash Flows from Investing Activities

• Cash Flow from Financing Activities

Limitations of Financial Statements

Financial statements offer a lot of information about the financial state of the company. However, they have some limitations as well. Investors and creditors of the company use these statements to analyze the company’s profitability, but they also often draw assumptions regarding the company’s financial performance.

 Investors depend on these data to make predictions about the future course of the company’s stock price. Investors mustn’t jump to conclusions just by a single year’s performance. It is crucial to compare numerous periods to decide the trends and compare its results with its competitors.

Conclusion

The financial statements are informative reports about the financial performance of the company. Each of these statements provides valuable insights into the business conditions such as the business’s profits and losses, assets, liabilities and shareholders fund, and incoming and outgoing flow of money. Investors, analysts, and government often use these to estimate the company’s earning potential. It helps to determine the capability of the business.