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The Importance of Financial Statements

Table of Contents

Introduction
Discussion
Conclusion
References

Introduction

The income statement, sometimes denoted as the profit and loss statement or statement of operations, displays the revenues and costs incurred by an establishment over a specific period. It assists business owners in making defensible judgments by calculating the net profit or loss for the period (Stobierski, 2020). The matching principle, which mandates that expenditures be documented simultaneously as the relevant revenues, is the foundation of the income statement.

The income statement has two types of expenses, and they include primary and secondary. The companys primary expenses are also called operational expenses and are those directly connected to its core operations, such as personnel salaries, sales commissions, and utilities. Expenses incurred from non-essential operations or investments are called secondary or non-operational expenses. Examples include interest paid on debt, research and development, insurance premiums, and marketing expenses.

Discussion

A balance sheet is a type of financial statement that demonstrates the state of an establishments finances at a particular point in time. It evaluates the corporations financial health and lists its assets, liabilities, and shareholder equity (CFA Institute, n.d.). A corporation can satisfy its short-term financial obligations if it has a high current ratio, which shows a healthy balance sheet.

A firms existing assets are shown on the assets side of the balance sheet. Short-term assets are usually referred to as current assets that will be converted into cash in a year or less. A corporation uses fixed assets, which are non-current assets, in its manufacturing process. These assets include real estate, machinery, and equipment. These assets, utilized to create products and services over a more extended period, are listed in the balance sheets non-current asset column. Non-physical assets, known as intangible assets, have long-term worth but are challenging to assess because of the haziness of their potential advantages. Some intangible assets comprise patents, copyrights, customer lists, trademarks, and broadcast rights.

The claims of creditors and owners are shown on the balance sheet, including liabilities and equities. Liabilities for a business are items that are listed on the right section of the balance sheet and comprise obligations that a company owes to outside parties. Equity represents the ownership interest in a business and includes the capital invested by shareholders. On a companys financial statements, it is not listed as an asset or a liability. Instead, the assets and liabilities of a corporation are subtracted to determine equity.

The owners equity (also known as stockholders equity) section on a corporate balance sheet typically includes three different accounts: common stock, retained earnings, and additional paid-in capital. The value of the stockholders ownership interest in the company is shown in the balance sheets section on stockholders equity. Paid-in capital and retained earnings make up its two components. The fraction of the companys shares held by an investor symbolizes the value of their ownership interest. In accounting, a companys book value, the variance in assets and liabilities, is referred to as its equity value. The balance sheet shows equity, and if it is negative, the businesss liabilities exceed its assets. The value of the companys common stock retained earnings and other comprehensive income is shown in the balance sheets column under Total Shareholders Equity.

A cash flow statement is a financial record showing how much money comes in and goes out of a business over a given period. It displays a businesss revenue from operations, investments, and financing activities (Franklin et al., 2019.). The statement computes the net cash flow and highlights all cash inflows and outflows from an establishments continuing operations and external sources of investment. Operating, investment, and financing activities are the three primary divisions of the cash flow statement. A cash flow statement is a valuable instrument for evaluating a businesss financial standing and cash flow generation capacity. A firms business operations unrelated to financing or investing are operating activities.

Conclusion

The cash flow statements operating activities section details the way the company spends its money during a given time frame. Moreover, the cash flow statements financing operations section details how a company raises capital from investors and pays them back. Information on dividends paid, the repurchase of common stock, and the proceeds from the issuing of debt are all included in this section.

References

CFA Institute. (n.d.). Understanding balance sheets. CFA Institute. Web.

Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting: Financial accounting. OpenStax.

Stobierski, T. (2020). Income statement analysis: How to read an income statement. Harvard Business School. Web.

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