Financial statements are important tools in furnishing information about a company’s fiscal condition. The financial statements are used by different categories of people for different purposes.
Users of Financial Statements:
These statements are mainly used by:
Management of a company
Internal Revenue Services
Other government agencies
To make the optimum use of a financial statement, the most important thing is understanding financial statements. Understanding financial statements is not complex and one needs to understand some basic concepts.
A financial statement may be of the following types:
Statements of cash flow
Statements of retained earnings
They are also referred to as primary financial statements. To understand financial statements better, each type of financial statement should be understood separately.
Understanding Financial Statements:
- Balance Sheet: The balance sheet provides vital information about the financial condition of a company at any particular moment(usually end of a fiscal year or after an accounting period). The balance sheet furnishes details of the company’s assets. Assets include all the resources owned by the company. It also highlights the liabilities of the company. Liabilities include any material or money, which the company is expected to pay to others. Assets include accounts payable as well as accounts receivable. Assets also include:
- Merchandise Inventory
Mathematically, assets can be represented as net worth added to the liabilities or,
Assets = Net worth+ Liabilities
The balance sheet manifests the distribution of assets, liabilities and net worth at a given time.
Assets may be:
- Current assets
- Fixed assets
- Other assets
Liabilities may be:
- Current liabilities
- Long term liabilities
- Income Statement: The income statements indicate the total expenses as well as sales of a company. The income statement is also known as the Profit & Loss statement or the P&L statement. This statement highlights the actual earning of the company after deducting the total expenses incurred by the company for its various operational activities and other related expenses.
- Statement of Cash Flow: The cash flow statements reveals the flow of cash within the company and the cash flowing out of the company. It keeps an account of the account payable and accounts receivable.
- Statement of Retained Earnings: This statement furnishes details of the equities and details pertaining to ownership of the same.
Understanding financial statements are very simple and the financial statements are required to be prepared as per the generally accepted accounting principles or GAAP norms. The financial statements are usually prepared by the certified public accountants or more commonly referred to as the CPAs.
Last Updated on : 26th June 2013