Financial Statements
Candlefocus EditorThe balance sheet is a representation of a company’s financial position at a specific moment in time, primarily as it relates to assets, liabilities and shareholders’ equity. It provides an overview of a company’s net worth, which is calculated by subtracting total liabilities from total assets. The balance sheet is one of the three primary financial statements of a company and provides information about the firm's assets, liabilities, and shareholders' equity (i.e. what is owed compared to what is owned).
The income statement focuses on a company’s revenues and expenses during a particular period. It reveals a company’s profit or loss by comparing revenues to expenses. This includes operating and non-operating activities. Revenues are revenues generated from a business’s primary operations, whereas non-operating revenues are generated from activities that are not directly related to the key business operations of the company. Operating expenses are related to salaries and other costs associated with running the business, while non-operating expenses relate to activities that are not directly related to the key business operations (i.e., interest expenses). Once operating and non-operating activities have been accounted for, the statement produces a company's net income, which is its profit figure.
The cash flow statement (CFS) measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund its investments. It records the movement of cash within a company. It is commonly used to determine how well a company is generating and managing its cash reserves. By knowing how much cash is available, decisions can be made about leveraging existing resources and/or investing for future growth opportunities.
The statement of changes in equity is designed to help understand changes that have occurred to the equity of a company over a certain period of time. It is important for the sake of transparency and to provide the necessary information when making decisions about a company’s route to the future. This statement records how profits are retained interact with equity reserves and how they are distributed to external parties, such as creditors and shareholders.
In sum, financial statements are critical as they provide a snapshot of a company’s financial health and performance. Knowing how efficiently and effectively a company’s assets, liabilities, and equity are being managed is paramount to making informed and strategic decisions. They are the basis for determining the success of a business, as well as its future direction.