The Fundamentals of Financial Statements
In general, financial statements show you where a company’s money came from, where it went, and where it is now. For example, did it come from sales, investments, or loans? How was it spent? How much was spent, how much is available and how much is invested?
Primarily, financial statements tell you where in your business your money is, so you can keep track of it and manage it effectively. For instance, through financial reports, you can see if your money invested in stock, trapped in non-performing fixed-assets or collecting dust in an outdated inventory.
Ultimately, well-organized, financial statements summarize what you need to know in a way that lets you quickly pick out key issues. A Balance Sheet, for instance, will clearly show an amount such as $100,000 is invested in overall plant assets as of a specific date (see illustration below).
Some financial statements are governed by a legal framework with international standards of accounting and auditing, and are generally prepared by a professional accountant or tax accountant. However, these are not necessarily the financial statements that you need to run a business. Instead, financial reporting and statements, sometimes referred to as “management accounting” is what you need for business decision-making and is the primary focus of this book.
Financial Statements – The Basics
Fundamentally, the four main, standard financial statements and the type of information they provide are:
- Balance sheets – a company’s financial position (assets, liabilities and net worth) at the end of a time period such as for a quarter, for a year, over the past three years, and so forth.
- Income statements – Earnings (net income and expenses) for the period
- Cash flow statements – How and where cash moved during the period
- Statement of shareholders’ equity – Comprehensive income (changes in equity and value of ownership) for the period.
Look for the next four posts in this series that more closely examines each of the four types of financial statements.
Fundamentals of Financial Statements, 4 Part Series