What Are Financial Statements?
Financial statements are a crucial tool companies use to monitor and gain insight into the company’s financial health and performance. They provide a clear picture of a company’s financial condition as well as the results of operations and cash flow.
While financial statements are often use internally to inform managerial decisions, they can also be utilize by outside stakeholders like creditors, investors analysts, regulators, and investors.
Financial statements assist in making choices about investing in a business and providing money to a business or offering other types of financial assistance.
There are three main types of financial statements: balance sheets, income statements, and cash flows statements.
These are create with the help of the Generally Accept Accounting Principles (GAAP). GAAP is a set of guidelines as well as rules that U.S.-base businesses must follow in preparing its financial reports.
A balance sheet can be describe as a statement of financials that gives an overview of the business’s financial assets, liabilities and capital. It’s use to evaluate the financial condition of a company at a particular date.
There are two parts of the balance sheet: that of the left (assets) in addition to the other section (liabilities as well as equity). The balance sheet follows an accounting formula:
The company’s assets must always be equal to the sum of its liabilities and equity of shareholders. Therefore, a balance sheet should always reflect a balance.
For instance, a business buys equipment with credit to purchase $2,000. The purchase would result in increase assets (equipment) as well as the liability (credit purchase) in the amount of $2,000. The company’s assets will be equal to its liabilities and shareholders equity.
Components of a Balance Sheet
The balance sheet is comprised of assets, liabilities and equity are the components of the balance sheet.
Assets are all that a business owns and uses for the purpose of generating income. They are the cash flow, investments, inventory, as well as properties, plants, and equipment (PP&E).
They are the amount a company is liable to other companies. They include accounts payables notes payables, loans, and so on.
Equity is the part of the company that is own to the shareholders (i.e. shareholders). Equity can also be referred to as the value of a business’s books (or net worth). It is the value of assets after liabilities are paid. It comprises retain earnings, capital paid-in outstanding shares, as well as Treasury stock.
Base on the balance sheet it is clear that, as of September 2021 the Apple Inc.’s Total assets are 351,002,000. Its total liabilities total $287,912,000 and the total shareholders’ equity amounts to $63,090,000. This when add together will amount to the total assets of $351,002,000.
Income statement refers to a statement of financials that reveals a company’s revenues as well as expenses and profit (or the loss) over a specified period of time.
It’s often refer to in the form of the profits and losses (P&L) statement. It is essential in evaluating the business’s profitability Importance of Financial Projection Analysis Texas.
Components of an Income Statement
The elements of an income statement are different depending on the type of business but here are some of the most frequently use elements:
Revenue refers to the amount an organization earns from the sale of its products or services. Base on the business it could also be describe as “sales revenue” or “sales.” Revenue is usually report as net sales because it excludes any sales returns applicable allowances, discounts, and allowances before the cost of items sold is taken into account in order to determine gross profit.
Cost of Goods Sold (COGS)
COGS refers to the direct costs that are associated in the making of a product. This is also known by the term cost of sale for companies who offer services. This covers the costs of direct labor, direct materials and direct overheads for factories.
Gross profits refers to the gap between the company’s income (net sales) and the price of the goods sold. It is a measure of the effectiveness of a business’s manufacturing and selling processes Family Office Singapore.
Operating expenses are those expenses involve in managing a company on a daily basis. These are expenses that are made up of direct expenses incurred in the creation of the company’s products and services, but aren’t include in COGS. These include things like rent, utilities, as well as the cost of wages or salaries.
General, selling as well as administrative (SG&A) costs, or in the sense of the costs that are not relate to production, generally are group along with operational expenses. Some businesses also decide to include this as an item distinct apart from operational expenses.
Operating profit is the company’s earnings after deducting all operating costs from the gross profit.
Non-operating expenses are all other expenses and revenues which are not an integral part of the company’s core activities. These include interest expense and interest income, as well as earnings from sales of unusual items, litigation expenses and taxes.
Net Profit or Loss
It is the sum of money a business can keep after removing the non-operating elements of the operating profits. This is the bottom line of an income statement and is the total of the company’s income or loss for an amount of time.
Net profit is when the revenues of a business exceed the expenses. Net loss happens when it’s the reverse the other way around.
In the above income statement the Apple Inc.’s gross profit at the end in September of 2021 stood at $152,836,000. it’s operating income was $108,949,000 as well as the profit net was $94,680,000. This implies that the company has a the profitability margin of 26 percent, which is the proportion of its net profit derived from the total sales.
Cash Flow Statement
The cash flow report is a different type of financial report that gives a clear picture of the company’s cash flow and outflows over a certain time. The cash flow statement displays the amount of cash being produced or utilized by a company and it can be used to evaluate its financial health.
Components of a Cash Flow Statement
Cash flow statements consists of these components principally:
Cash Flow From Operating Activities (CFO)
This shows the quantity of cash generate by the company or derive in its business activities. This could include the amount of salary payments to employees, payment from customers and cash payments to suppliers.
Operating cash flow is an important measure of its viability of its main operations.
Cash Flow From Investing Activities (CFI)
This is how much money the business has earn or use for investing. This could include buying plant, property and equipment, as well as the purchase of securities.
Businesses employ CFI to determine their capacity to make money from investments and make decisions regarding potential investment options for the near future.
Cash Flow From Financing Activities (CFF)
This represents the amount of money that the company has earn or use through its financing activities. This may include issuance of new equity as well as borrowing money or paying back the debt.
Businesses employ CFF to evaluate their business’s capability to finance and take decisions regarding the issue of new capital or debt.
Cash Flow Statement Example
This illustrates an accounting of cash flow for Apple, Inc.
In the context of the cash flow report that was mention above, Apple Inc.’s Total CFO in September of 2021 totale $104,038,000. The company use $14,545,000 in investment activities, and $93,353,000 for financing activities. The overall decrease of cash and cash equivalents and cash with restrict access was $3,860,000. The balance at the end of the month was $35,929,000 after subtracting the decrease in its beginning balance.
Limitations of Financial Statements
Financial statements are a useful tool to analyze a company’s financial performance, financial position as well as cash flows. But, there are a few limitations to be taken into consideration when interpreting the information.
First of all, financial statements give a glimpse of the financial situation of a business at a certain moment in time. They don’t reveal how the business got there or what could be expect in the near future.
The second reason is that financial statements contain only data that can be quantified in terms of money. The numbers therefore are not a reflection of vital information such as customer satisfaction or morale of employees.
Thirdly, managers can alter financial statements in order to create an inaccurate picture of the financial condition of the company. For example, a business could recognize revenue before it is due or delay expenditures in order to make its financial statements appear more impressive than they really appear to be.
The fourth reason is that financial reports give a limit view of the competitive position of a business. They don’t reveal details such as brand awareness or market share.
In addition, financial statements can be difficult to comprehend without an knowledge of accounting principles. This means they are not available to many who would benefit from their aid.
Even with their shortcomings they are important tools to evaluate the financial condition of a company. When considering the analysis of the data it is essential to be aware of its limitations data and utilize other sources to enhance the analysis.
Financial statements record the company’s financial operations and serve to show the performance of the business.
The three most important financial statements are the balance sheet income statement, and the cash flow statement. These financial statements are crucial to understand the financial position of a business performance, as well as cash flow.
It is important to be aware that financial statements are not without limitations. They must be use alongside other financial data to provide the complete view of a company’s financial position.