Corporate financial statements is a formal record of the financial activities and position of a business or other entity. If you want a clear understanding of how your business is doing financially, and you want to be able to predict and plan for the future, a fairly thorough understanding of your financial statements is essential.
Understanding Financial Statements
A sound understanding of financial statements will help you, as shown below:
Identify unfavorable trends and tendencies in your business’s operations before the situation becomes critical.
Monitor your cash flow requirements on a timely basis and identify financing needs early.
Monitor important indicators of financial health (i.e. liquidity ratios, efficiency ratios, profitability ratios and solvency ratios).
Monitor periodic increases and decreases in wealth, especially the owner’s or shareholder’s equity.
Basic Types of Financial Statements
There are four basic kinds of financial statements that can help you determine the present condition of your business.
1. Income Statement
The income statement shows you a summary of the flow of transactions your business has had over the entire accounting period. In other words, the income statement shows you what happened during the period between balance sheets. Frequently, three years’ worth of income-statement data are presented, so that you can make comparisons and identify trends. An in-depth knowledge of accounting is not necessary for you to make good use of the income statement data.
2. Balance Sheets
The balance sheet is a statement of your company’s relative wealth or financial position at a given point in time. It gives you a fairly clear picture of the business at that moment, but does not reveal how the business arrived there or where it’s going next. That’s one reasons why the balance sheet is not the whole story——you must also look at the information from each of the other financial statements to get the most benefit from the data. The balance sheet consists of three categories of items: assets, liabilities and stockholders’ or owners’ equity.
3. Position Statement
The position statement, also known as the “statement of changes in financial position” or “sources and uses of cash”, provide data that are not explicit y present in the balance sheet or the income statement. This statement helps to explain how your company acquired its money and how it was spent. This statement can also help to identify financing needs, to identify cash drains and to identify holes in the cash budgeting process.
4. Statement of changes in Equity
This type of financial statement is used to bridge the gap between the amount of equity the owners have in the business at the beginning of the accounting period and the amount of their equity at the end of the period. There are several variations or types of statements that can be used to summarize the changes of the rights of owners. The type your business uses will depend on the nature of your business and your accountant’s preference.
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