Financial statements are the reports produced by a company to showcase its financial performance and condition. They are crucial for decision-making processes by management, investors, and creditors. The primary financial statements include:
Income Statement: This statement shows a company's revenues, costs, and expenses over a period, providing information about a company's profitability.
Balance Sheet: It provides a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time.
Cash Flow Statement: This statement shows how changes in balance sheet accounts and income affect cash and cash equivalents, breaking the analysis down to operating, investing, and financing activities.
Income Statement:
Revenue
- Cost of Goods Sold (COGS)
-----------------
Gross Profit
- Operating Expenses
-----------------
Operating Profit
- Taxes & Interest
-----------------
Net Income
While all financial statements share the goal of reflecting a company's financial status, their formats differ based on the information they present.
The Income Statement starts with revenues, subtracts various costs and expenses, and ends with net income.
The Balance Sheet follows the equation: Assets = Liabilities + Shareholders' Equity.
The Cash Flow Statement is divided into cash flows from operating, investing, and financing activities.
Each financial statement provides unique insights into a company's financial health:
The Income Statement provides information about a company's profitability and its ability to generate profits by increasing revenue, reducing costs, or both.
The Balance Sheet shows what a company owns and owes, as well as the amount invested by shareholders.
The Cash Flow Statement shows the company's cash generation and spending, which is essential as profits alone do not guarantee survival - cash is needed to meet obligations.
Understanding these statements is crucial for anyone involved in financial decision-making.