Starting a new company or running a business is exciting. You get to work on exciting ideas with driven people. However, this experience can turn sour with something as small as a PDC Chequeif you don’t know how to track the important financial statements and strategize around them. So here is a list of some of the most important financial statements, that you as a business owner or an accountant should know about:
The Balance Sheet
Also referred to as the statement of financial position, this report lists a company’s assets, liabilities and stockholders’ equity at a given point in time. It gives investors an idea of the company’s financial leverage and liquidity. The balance sheet is comprised of three basic elements: assets, liabilities and shareholders’ equity.
These are resources owned by the business. Assets include cash, other current assets such as accounts receivable or inventory, investments in debt or equity securities, land, buildings and equipment. Assets come fall into two categories in the balance sheet, they are either viewed as a current asset or an asset for the long term. Current assets are cash and those assets that will be converted into cash within one year of the balance sheet date. Long-term assets (also called fixed assets) are those that will not be converted into cash within one year of the balance sheet date.
These are obligations of the business arising from past transactions or events that require future transfer or use of assets. Liabilities include accounts payable, accrued expenses payable, income taxes payable and other current liabilities; long term debt; bonds payable; and other noncurrent liabilities. In general, current liabilities are expected to be paid within one year while long-term liabilities generally extend beyond one year but not more than 10 years
The Income Statement
A company’s income statement provides a snapshot of its financial health. Investors and analysts use it to determine how profitable a company is, and they use this information to decide whether to buy or sell the stock. A company’s income statement is also known as its profit and loss statement, or P&L. Credit balance of a profit and loss account is one of the most important metric of an income statement. The income statement captures all of the company’s revenues and expenses for the period reported, which is typically a year or quarterly report. It includes liabilities such as loans and debts you owe (your creditors) that can lower the value of your business. You can gather crucial information to proceed with your goals, such as reviewing your business credit report for a possible expansion loan.
The income statement tells investors whether the company is operating at a profit or loss, where that money came from, and where the money went. It also details how much the company has earned compared to previous reporting periods. These comparisons allow investors to determine if there are any trends in the company’s performance.
Furthermore, understanding the financial statements can be particularly important when you need to find a buyer for your business. Prospective buyers will closely examine the income statement to evaluate the company’s profitability and potential for future growth, making it essential to present accurate and transparent financial information.
The income statement starts with sales revenue, which comes from selling goods or services. Sales revenue minus the cost of goods sold equals gross margin. Gross margin minus all other operating expenses equals operating profit, or earnings before interest and taxes (EBIT). Operating profit minus interest expense plus other income equals pretax profit. Pretax profit minus taxes paid equals net profit after taxes. In addition to these line items, some companies provide additional disclosures in the form of footnotes that help explain why the company’s earnings were higher or lower.
The Cash Flow Statement
The cash flow statement is important for assimilating data about a company’s receipts and its payments in a fixed accounting period. These calculations establish a link between the ending and the beginning balance.
The statement of financial position shows what the company owns and what it owes at a point in time. The income statement shows how much money a company made and spent over some time. The two go together: the income statement shows where the money came from (inflows), and the statement of financial position shows where it went (outflows). The cash flow statement is like a bridge between them.