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Basic Financial Statements
Four basic financial statements are Income Statement, Balance Sheet, Statement of Owner’s Equity and Cash flow Statement. Income statement shows the profit earned or losses made by an organization. It covers 2 categories under which financial data may be classified, they are revenue and expenses. It represents the revenues earned and expenses incurred during a particular period.
Balance Sheet covers all other 3 categories under which financial data of an organization may be classified. They are assets, liabilities and owner’s equity. It shows the financial position of the organization on a particular date. It shows what is owned and owed by the organization.
Statement of owner’s equity describes the movement in the capital account of the owner. What was his investment at the start of the particular, what additional amount has been added by him during the period as investment or as profit and what amount he has withdrawn from the business.
Statement of Cash flow describe from where the cash has come in and from where the cash has gone out. Normally it is divided into three categories:
a. Cash flows from operating activities. It comprises of revenues received during the period in cash and expenses incurred during the period in cash related to the operation of the business.
b. Cash flows from investing activities. It comprises of buying and selling of fixed assets and other investment.
c. Cash flows from financing activities. It describes the sources from where the organization has generated long term finances. It includes both borrowing in the form of long term debt and issuance of common stock
and preferred stock.
Most important financial statement
Cash flow statement is the most important as it describes from where the cash comes in and to where the cash goes out. Cash is the life blood of an organization and no business can be run if there is no cash.
Use of Financial Statement
Different departmental managers can use the information provided by financial statements. The marketing manager can check the sales figure to make sure that they according to the target. Business decisions like what the profit has been earned? What is the level of assets used and how they are used? What is the performance of the company compare to previous year? These all types of decision may be done by analyzing financial statements.
There are different ways of analysis:
1. Trend percentage analysis tells the trend of particular item over the years. The trend may be inclining, declining, constant or zigzag.
2. Common size analysis, which is also known as component % analysis describe the relationship one item of income statement or balance sheet with its total, i.e. sales or total assets respectively.
3 Comparative analysis compares the figure of two years of two companies and highlights the changes in a particular item.
4 Ratio Analysis describes the relationship between two items of financial statements.