Question

The balance sheet provides a snapshot of the company finances at one point in time. It helps assess risk. The income statement (or profit-and-loss statement; P&L) shows how a company has performed over a specific period of time. It measures profitability. The cash flow statement records the difference between the money that came in and the money that went out. It also shows the reasons for the difference. It measures liquidity. All of these statements serve different functions, but they work in harmony with one another. Give three examples (one for each statement) of when these statements are needed and for what purpose. Stay away from vague generalities (e.g., “Every business needs each of these statements.”). Although such statements are true, it is important to recognize when each of the statements is most helpful, taking into consideration which questions can be answered using each statement. Include in your answer who is most interested in each of the statements (e.g., bankers, investors, small business owners).

Answer 1

Balance Sheet:

• When: To sanction a loan from a bank/ financial institution.
• Purpose: Balance sheets are helpful to banks to know, if your business qualifies for additional loans or credit or not.
• Which questions can be answered? : Financial position of a company, Credibility of the company, loan repayment position and various financial ratios.
• Who is most interested?: Bankers and management

Profit & Loss Statement:

• When: To attract investors after showing proftability of the company at the time of IPO.
• Purpose:  It shows a company’s financial progress during the time period being examined., which attract investors and other stakeholders to invest in the company.
• Which questions can be answered? : All questions based on revenue and expenses during a particular period can be answered.
• who is most interested? : Investors and management

Cash Flow Statement:

• When: To cover day to day routine expenditures to maintain a smooth operation for the business.
• Purpose: Cash flow statement can maintain a balanced cash position in the company, i.e. cash only as per requirement, not more or less.
• Which questions can be answered?: What is the liquidity position of the company?
• who is most interested? : Management