Financial Statements

A company’s financial statement consists of its complete annual financial information; this includes an income statement, balance sheet, and cash flow statement. The financial statement is the previous year’s report, from January 1st to December 31st, and is collected online at the end of March. This data is essential for analysing and interpreting the company’s current and past performance. We can predict the company’s probability of success or failure by analysing this data. Several organisations can analyse this data. Banks or investors also use these reports to determine whether they should lend money to/invest in the entity. A finance manager analyses the report to check the company’s operational efficiency and managerial effectiveness. The top management analyses the financial condition (present and past) and the firm’s best use of available resources.

Balance Sheet

A balance sheet in accounting is a financial statement that describes the entity’s assets and liabilities, as well as the owner’s equity, for a particular period. Thus, it is the basis for computing rates of return for investors. The balance sheet also evaluates the company’s capital structure. The assets in a balance sheet shall always be equal to the sum of liabilities and shareholder’s equity. If the sheet is not balanced, there must be some misplaced data, exchange rate error, or miscalculation.

To simplify, it can be said that the balance sheet clarifies what an entity owns and owes and the equity of its shareholders. Investors can derive various ratios such as the debt-to-equity ratio and the acid-test ratio from a balance sheet to analyse the company’s financial health.

• Assets

For any entity, assets are economically significant resources that will be useful for generating positive economic value. An asset represents the value of any resource that can be converted into cash if needed. There are two types of assets: tangible (physical assets) and intangible (non-physical assets). 

Assets = Liabilities + Owner’s Equity

Examples of assets: Cash and cash equivalents, vehicles, furniture, accounts receivable, inventory, patents, investments etc.

• Liabilities

A liability is a future sacrifice that any entity is obliged to make because of any past event or interaction. There are two types of liabilities in a balance sheet: current liability (to be liquidated within a year) and long-term liability (does not need to be liquidated within a year). 

Examples of liabilities: Bank loan, overdraft, interest payable, salary payable, tax payable, borrowing from the parent company, intercompany account payable etc. 

• Equity

 The equity of any company is the value that must be returned to the company’s shareholders after liquidating all the assets and paying all debts.

Examples of equity: Common stock, treasury stock, dividends, preferred stock, additional paid-in capital, contributed surplus etc.

Income Statement

An income statement, a type of financial statement, covers the company’s financial information over a specific time. It is also called the profit and loss statement, as it tells us about the company’s profit or loss by comparing it with other years. It focuses on the revenue and expenditure of the company, and we can calculate it by subtracting the company’s expenses from its revenue.

Income Statement = Revenue – Expenses

• Revenue

 A company’s revenue is the total income it generates by selling its goods or services. It is also called the sales or turnover of the company.

• Expenses

 The expenses of any entity will be the money spent on pursuing any revenues. They are the costs of running a business.

Cash Flow Statement

The cash flow statement tells investors and shareholders how the company is running. It describes the company’s source of money and how it is spent. Thus, it also clarifies whether a company is financially strong or not. It complements the other two financial statements: the balance sheet and the income statement. These cash flow statements comprise three parts: operating activities, investing activities, and financing activities.

Conclusion 

Any company’s financial statement is the annual financial health report that includes the expenditure, breakdown of income, increasing/decreasing assets, and itemised balance sheet. The income statement, balance sheet, and cash flow statement are the three basic types of these statements. A balance sheet in accounting is a financial statement that describes the entity’s assets, liabilities, and owner’s equity for a particular time. The income statement (profit and loss statement) is a type of financial statement that covers the company’s financial information over a specific time and examines profits or losses. The cash flow statement pertains to the company’s power to generate cash to pay off its debts.