Question

Name the three financial statements and answer both questions below for all three financial statements.

What is the goal of each statement? What can you tell from it?

How does each statement help tell the story?

Answer 1

3 financial statements are:

1. Profit and Loss Statement

2. Balance Sheet Statement

3, Cash Flow Statement

All of the three financial statements are interlinked and infact availabilty of any two means that the thrid can be derived from it.

PnL statement - tells you about the overall business done over a period of time- helpful for evaluating the revenue soruces, cost items, relationship between revenue and costs and profit margins for the business. Profit margin ratios and ebitad margin ratios, help us in determining our cost strcutures and comparing against other businesses in order to understand which costs might be high or low

Balance Sheet Statement: Tells you about the available asset and liability for the business at a given point of time (and the beginning and end of the period under evaluation in PnL statement). This helps us in knowing few crucial elements of the business:

a. how is the business funded

b. what is the amount that is to be paid and recovered from our vendors and clients respectively and hence what is the working capital required to run the business

c. It also tells us important thigns like how much have we invested into assets for producing the revenues

d. What is the current cash outstanding in the business

Such improtant things helps us understand the fficiency with which we are producing our revenues. Eg asset turnover ratio helps us understand if we are using the assets efficiently or not, Financial ratios from Balance sheet help us understand if we are deploying our sources of fund properly or not and Working capital ratios indicate how liquid we are in terms of running our business

Cash Flow Statement: Cash flow statement serve the most important purpose of telling us the actual cash movement int the firm. This helps us determine what cash was obtained in Operational, financial or investing activities and hence help us in tracking the movement of cash. This helps us detemine where all cash was deployed or received through out the year.

Now all statements together paint a complete picture for a company. These statements ideally have different goals for differennt set of people reading them.

Eg for internal CEO and management team, it helps them understand their company in totality adn helps us derive places where they need to focus.

For Extenal investors and analysts, the statements together paint a picture of strength and weakness of company and in combination with external factors and competitors it helps them determine the attractiveness of investment into the company. In addition, one important point to note is that for investors, Cash flow usualy is a strong statement becuase while a lot of numbers can be manufactured in the PnL and Balance sheet, cash flow brings them all down by displaying the exact places where cash was deployed.

Hope this helps.