Financial statements provide a glimpse into the financial life of the company. They show how money flows through the business and reveal its financial health. For small business owners seeking investment opportunities or trying to attract investors, it is helpful to understand how to create and assess these reports.
Main Components of Financial Statements
In this article, you will learn about three types of financial statements: balance sheets, income statements (also known as profit and loss statements), and cash flow statements.
Interpreting Financial Statements
Financial statements provide a financial snapshot of your business. They are the first thing investors and banks want to see if you are looking to raise additional capital, and they often rely heavily on them to grant you funds.
Components of Financial Statements
Assets are the valuable funds, cash, investments, patents, or trademarks owned by the company. Assets can be current (convertible to cash within one year) or non-current (taking longer than a year to sell). Some non-current assets are fixed or non-sellable as they are needed to run the business, such as vehicles or office furniture.
Liabilities are the debts owed by the company to suppliers, business loans, rent on properties, employee salaries, and other obligations. Liabilities can be current or long-term.
Shareholders’ equity, also known as capital or net worth, is the cash value of the company if all assets were sold and all liabilities paid. Shareholders’ equity is the amount invested by the owners in the company’s stock, along with its profits or losses since inception.
Interpreting the Income Statement
Income statements report the amount of revenue earned by the company or losses incurred during the reporting period. The report also includes earnings per share (EPS), which indicates how much money shareholders can expect from the company if it distributes all its net earnings for the period.
Interpreting the Cash Flow Statement
The cash flow statement reports the inflow and outflow of cash for the company. It shows the net cash increase or decrease during the reporting period from operating, investing, and financing activities.
Financial statements are a powerful tool for understanding the financial position of a company and making informed investment decisions. Small business owners and investors can benefit from the information contained in these reports. Strengths and weaknesses of the company can be identified and addressed through the necessary focus and effort to analyze the numbers.
Frequently Asked Questions (FAQ)
What does the financial statement include?
The financial statement includes details about various aspects of the company’s sales, operations, and financial sustainability by providing a record of gains and losses, strengths, and weaknesses over a specific period.
Why are financial statements important?
Financial statements are important because they can assist business owners and potential investors in making better decisions regarding the company’s ability and long-term strength.
Source: https://www.thebalancemoney.com/interpreting-the-cash-flow-statement-1200760
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