Question

3 large financial statement, Balance Sheet, Income Statement and Statement of Cash Flows, determine the one where you think you will use the most, write 1-2 page defining the statements, explain the information that statements covers also explain how you will use that statements in the workplace and what value information that statements will provide.

Answer 1

Financial statements are written records of a business's financial transactions.

The three financial statements are:

(1) Income Statement

(2) Balance Sheet,

(3) Cash Flow Statement.

Income Statement

Often, the first place an investor or an analyst will see is the income statement. The income statement shows the performance of business in particular financial year, showing the sales revenue at the top. The statement then deducts the cost of goods sold (COGS) to find gross income. From there, the gross income is affected by other operating expenses and income, depending on the nature of the business, to achieve net income at the bottom: "the bottom line" for the business. The income statement is used by analysts to evaluate profitability.

Balance Sheet

Balance sheet displays the financial position of a business on reporting date. The balance sheet has 3 sections:

1) Assets

2) Liabilities

3) Shareholders’ equity.

Assets = Liabilities + Shareholders Equity

Above mentioned equation must always match.

The asset section of the balance sheet includes Current assets and Non-current assets. Current assets means which can be quickly converted into cash usually less than a year. Current assets are Cash and equivalents (which should equal the balance found at the end of the cash flow statement), Account receivables, prepaid expenses, inventory. Non-current assets include Plant, property equipment etc.

Liabilities can be current and Non-current. Current liabilities can be account payables, outstanding expenses, and short term debts. Non-current liabilities include long terms debts.

Shareholder’s equity contains Share capital and retained earnings.Net income from the income statement flows into the balance sheet as a change in retained earnings (adjusted for payment of dividends).

3 Cash flow statement

The cash flow statement has 3 sections

1) Cash flow from operating activities – Operating income, operating expenses etc.

2) Cash flow from investing activities – Purchase and sell of non-current assets, depreciation etc.

3) Cash flow from financing activities- Borrow loan, raise capital, repayment of loan etc.

Cash flow statement shows cash inflows and outflows from above mentioned 3 activities over a period of time. It undoes all accounting principles to show pure cash movement in particular financial year.

The cash flow statement takes net income from income statement and adjusts it for any non-cash expenses like depreciation. Then, using changes in the balance sheet such as (change in working capital, change in share capital, change in debt, change in fixed assets) usage and receipt of cash is found. The cash flow statement displays the change in cash in particular financial year, as well as the beginning balance and ending balance of cash.

These three core statements are linked to each other. It provides user/investor/analysts useful financial data and information which assists them in making investment and financial decision. The entire set of financial statements assists users in credit decisions, investment decisions, taxation decisions, union bargaining decision etc.

The most important financial statement for the majority of users is the income statement, since it reveals the ability of a business to generate profit.
However, these 3 statements as a whole, present a complete picture of the financial condition and results of a business. It totally depends on the user’s requirement which financial statement they have great interest in.

• From auditor’s perspective: As auditors audit balance sheet, so this is the    document in which they have a great interest.
• Investor perspective. The analysis by investors of the value of the shares is largely based on cash flows, so they will have the greatest interest in the cash flow statement.
• Lawyer’s perspective. Anyone who brings a lawsuit against a company will first want to review their balance sheet, to see if there are enough resources/assets to add if it succeeds. Otherwise, it is not profitable to pursue a lawsuit.
• Management perspective. Managers are responsible for fine-tuning the business, so they are likely to delve into the income statement.