Michael

A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. Relevant financial information is presented in a structured manner and in an easy to understand form, through this post we will go through some of the financial statements and the usage of each one.

1-Balance sheet

Balance sheet (also called the statement of financial position), and it describes where the enterprise stands at a specific point of time. The balance sheet list all the enterprise assets, liabilities and owners’ equity.

  • Assets are economic resources that are owned by the business and are expected to benefit future operations.
  • Liabilities are debts that represent negative future cash flows for the enterprise.
  • Owners’ equity represents the owners’ claims on the assets of the business.

At any point the assets should equal to the sum of the liabilities and owners’ equity, and we call this the accounting equation.

2-Income statement

The income statement provides the user with data about the profitability of the enterprise, detailing sources of revenue and the expenses which reduce profit, by analyzing the income statement you can determine the actions required to increase the profit and to reduce the expenses.

The bottom line of the income statement is called net income or profit. Net income is either retained by the firm for growth or paid out as dividends to the firm's owners (investors) depending on the company's dividend policy.

3- Cash Flow Statement

Cash flow statement (also called Statement of Cash flow), it is concerned with the flow of cash in and out of the business, and it breaks the analysis down to operating, investing, and financing activities.

  • Operating activities include the cash effects of revenue and expense transactions.
  • Investing activities include the cash effects of purchasing and selling assets.
  • Financing activities include the cash effects of transactions with the owners and creditors.

It is very important for:

The Accounting personnel who need to know whether the organization will be able to cover payroll and other immediate expenses.

For Potential lenders or creditors who want a clear picture about a company's ability to repay depts.

And for Potential investors, who need to judge whether the company is financially sound or not.

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