Periodical reports regarding the company’s financial situations are useful to the business in managing its Finance as they help it to evaluate its progress. Some people may be entirely new to the world of finance and if you are a small business owner, an investor or simply someone aiming at being more financially literate you ought to learn about financial statements. In this post, let us discuss the three general Financial Statements, which are the Balance Sheet, Income Statement, as well as, the Cash Flow Statement.

What Are Financial Statements?

Financial statements are documented reports that present specific financial information of a business entity. They are useful in financial analysis, planning and control, decision making processes and meeting the regulatory requirements. These reports indicate a company’s profitability, its assets and liabilities as well as the cash flows.

The Three Main Financial Statements

1. Balance sheet

Balance sheet is a vital financial statement which gives an overall view or snap shot of the financial position of the business at a given interval of time.

It is a statement which gives an idea about the financial position of the company at a given date. It comprises of three main parts:

• Assets: What the company owns at its disposal, this could be in the form of cash, stocks, equipment or any other form of asset.
• Liabilities: Creditors, those who got funds from the company in some sort of agreements such as loans and those still to be paid.
• Equity: The owner’s investment in the company. The most basic accounting formula that applies to the preparation of balance sheet is:

Assets=Liabilities+Equity

This statement is used widely to determine the solvency and working capital position of a company or an investment.

2. Income Statement: Measuring Profitability

In other words, it is also called the Statement of Profit and Loss and shows the overall performance of a business based on its revenues and expenses earned within a given period. It is also used in determining areas of profit making or loss making in any business operation.

The key components include:

• Revenue which is also called turnover as it refers to money obtained from sales of goods or services.
• Outgo: Fixed expenses that are involved in the day to day operations of the business such as rent, cost of employees’ wages among others.
• Net income refers to the residual income after all the expenses that are related to operations have been subtracted from the sources of income.
• A positive net figure is suggestive of profitability whilst a negative figure means that there has been a net loss.

3. Cash flow statement 

Cash flow is one of the most crucial components of the balance of an organization and is utilized in the preparation of the cash flow statement that shows the movement of cash in and out of the business.

The Cash Flow Statement analysis receipts and payments made in a business on the basis of available cash. It is divided into three parts:

• Operation activities include cash generated from the normal course of business activities.
• Investing Activities: This is money used in buying fixtures and equipment and other securities for investment.
• Activities related to using funds from loans, dividends or issuing of shares.
• This is an important statement for small business accounting. Since it enables a firm to ascertain its solvency in relation to the daily operations.

Why Are Financial Statements Important?

• They assist in accounting, where they enable business organizations to come up with the right decisions to make with reference to their finances.
• They are a requirement for corporate finance, because they give basic ideas about a corporation’s operation.
• They provide support for recording of revenues, expenses and accounts payable.
• These are important for the investors and creditors to assess return and risk of an organization.

Conclusion

In a basic analysis of financial literacy, it is notable that any person should understand financial statements. As a business person or an individual preparing financial statements it is very important to learn to read them correctly. Because it will help one in coming up with the right decisions and making correct analysis of the company performance. Learning everything concerning the Balance Sheet, Income Statement and the Cash Flow State. You will be able to improve your understanding of the company’s financial position and its ability to succeed.