Financial statements summarize a company’s income and expenses, and include an income statement, balance sheet, and cash flow statement. These reports are reviewed by an independent accounting firm and used to assess a company’s financial health. A cash flow statement provides context for the other reports and reflects a company’s actual cash position. Financial analysts use these statements to assess a company’s financial health.
Each company issues its financial statement at the end of each fiscal or financial year. These documents provide a summary of all income and expenses incurred by the company during this period. The audience for financial statements includes company officers, investors, creditors, and customers.
A typical financial statement is made up of three separate reports: income statement, balance sheet, and cash flow. These three documents provide a detailed overview of the company’s operations, sales volume, and general management. In a publicly traded company, an independent accounting firm reviews these statements and an opinion is provided on the accuracy of these reports. This is called an audit opinion statement and is used to ensure that company records are accurate.
An income statement provides details of the sources of income, the amount received, and total expenses in broad categories. Typically, the categories of income are sales income, investment income, and service income. Expense categories include salaries and benefits, supplies, and vehicles. The net income or loss value is the difference between total income and total expenses. A positive value is a gain and a negative value is a loss.
A balance sheet provides a more detailed accounting of all the different categories and the amount spent or received in each. A breakdown of equipment costs into fixed assets and consumables can be found on the balance sheet. The purpose of the balance sheet is to get a more detailed picture of account activity.
The cash flow statement is used to illustrate the current position of cash, liquid assets, and accounts receivable. This report is a good indicator of the company’s operational management and the impact of its accounts receivable collection activities. A company may appear financially sound based on the income statement and balance sheet when it is not. A cash flow statement adds context to the reports and reflects the actual cash position.
A company’s financial statement provides a great opportunity to learn about the company’s finances. Take the time to compare the three main reports and read all the notes in the financial statements. These items provide context for the values in the statements and provide an enhanced perspective on the financial health of the company. A professional financial analyst uses five key ratios and calculations to assess and rank a company’s financial health. The information provided in the financial statement is used in these calculations and is provided to investors and financial institutions.
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