Introduction:
Financial statement are structured information that summarize an establishment financial performance and position.They are essential for business,investors and regulatory agency to asses financial health and make informed decision.
The three main financial statement.
1.Balance Sheet
2.Income Statement
3.Cash Flow Statement
Breakdown of financial statement
A. Balance sheet (Statement of financial position).
The balance sheet provides an instant picture of a company's financial position at a specific date. it includes:
1.Assets:Resources controlled by the organization (e.g; cash,inventory,property)
2.** Liabilities**:Financial duties or debt a company owes to external parties.(e.g loans,account payable)
3.Equity:The residual interest in assets after deducting liabilities.
The balance sheet follows this fundamental equation:
\text(Assets)=\text(liabilities)+\text(Equity).
Example: An organization with $100,000 in assets and $40,000 in liability has $60,000 in equity.
B.Income statement(Profit and loss statement)
Income statement report financial performance over a specific period.it include:
1.Revenue:Total sales from sales and services
2.Expenses: cost incurred to generate revenue (e.g salaries,rent).
3.Net profit/loss:The amount remaining after removing expenses from revenue.
Formula:
\text(Net profit)=\text(Revenue)-\text(Expenses)
Example:A company earning $50,000 in revenue with $30,000 in expenses has a net profit of $20,000
For more details,refer to the SEC'S guide on income statements.
c.** Cash Flow statement**
The cash flow statement monitors actual cash movement.it is categorized into:
1.Operating Activities:Cash generated from main business operations.
2.Investing Activities: cash spent on or received from investment(e.g buying equipment)
3.Financing Activities:cash flow from loans equity financing,or dividend payments.
Importance of financial statement
Financial statement help in:
1.Business owners:Decision making and financial planning.
2.Investors:Evaluation investment opportunities.
3.Lenders:credit assessment meaning determining a company's ability to repay loans.
4.* Regulatory Authority*:Ensuring compliance with accounting standards.
Common Misinterpretations
Revenue vs profit:High revenue does not indicate profitability.
Cash Flow vs Net income:A company can be profitable yet experience cash shortages.
*Liabilities: Not all debt is harmful,it depends on the business repayment ability.
CONCLUSION
financial statement provides essential insight into a company's financial condition.Having knowledge of them enhances financial literacy and supports informed decision making.
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