Understanding financial statement

The financial statement is a written record of financial activities that gives an overview of financials results and conditions. Financial statement has three basic components: balance sheet which is an overview of assets, liabilities and equity on a particular date, income statement shows net income of the company during a set period of time and cash flow statement which shows inflow and outflow of cash caused by company's activities during stated period of time. Financial statements are often audited to ensure accuracy for tax, financing and investing purposes.

Balance sheet reports your net worth at a particular point in time; you can understand it as snapshot in time, usually at the end of the fiscal year. It summarizes all financial data in three categories, assets, liabilities and equity. Assets are tangible objects of financial value owned by the company. Liability is debt owed to a creditor and Equity is a net difference when total liabilities are subtracted from total assets. Balance sheet shows how assets are funded (through debt or equity). Assets are listed in order of liquidity and liabilities are listed in order in which they will be paid.

Income statement gives review of revenues and expenses and it covers a range of time; it is usually issued quarterly and annually. When you subtract expenses from revenues you will found out is your company profitable. That is why it is also called profit&loss account. Income statement usually provides two or three years of data for comparison.

Cash flow statement describes how cash flow into and out of company. It is focuses on the three main activities that create and use cash. That activities are operation, investment and financing. Many investors feel that cash flow statement is the most transparent one and shows the true performance of business. Operating activities shows cash inflow from regular business operations. Investing activities includes cash flow from acquisition and disposition of assets. Finally, financial activities show cash flow from debt and equity.

Purpose of financial statement is providing information about results of operation, financial position and cash flow of a company with three main components. Additional significance of financial statement is that it helps businesses make various kind of decisions about credit, taxation and investment.

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