Question

Discuss the benefits of any or all of the major financial statements used in corporate finance. These statements include the balance sheet, income statement and statement of cash flows. Explain how you would use these statements to plan for the budget in the next fiscal year.

Answer 1

Financial statements consists of Balance sheet ,Income statement and Statement of cash flows. These statements represent financial position, financial performance and liquidity position respectively of an organisation. Without these financial statements, major decisions cannot be taken by the management and other stakeholders. Some benefits of these statements are given below:

Balance sheet

• It provides us with the information regarding financial position of an entity. It shows where an entity stands in comparision with its counterparts as on the given date.
• It reflects how much assets the company possess.
• It shows the liquidity position which help the management to decide whether the company would be able to meet immediate or short term obligations.
• It also helps lenders to decide whether to extend credit to the company or not i.e. whether the company would be able to serve its loan intrest and principal commitments.
• It helps in calculating many key ratios which helps stakeholders in decision making.

Income statement

• It provides us with the information regarding financial performance of an organisation for the particular time period. It shows whether the company is earning profit or incurring losses.
• It measures the revenue earned and expenses incurred by an entity and help in comparision with the profits of other companies in that industry.
• It reflects the efficiency with which the company is working which helps managemet to eliminate the inefficient activities.
• It also reflect tax obligations of the company.

Cash Flow statement

• It reflect the cash positon of an entity and helps to determine whether an entity have sufficient funds or not to pay various obligations like interest, to pay dividends, for investment, etc.
• It is critical for analysing the abundance or shortage of cash as both the situations are not considered ideal.
• It also helps in controlling unnecessary cash expenditure and helps in cash management.
• It reflects cash receipts and payments from operating, financing and investing activities.

For preparing budgets, these three statements are of critical importance. For example, cash flow statement would reflect the cash available in hand at the end of particular period which can help in planning how much loan can be taken or how much shares should be issued for raising the required amount.

Similarly, Balance sheet would provide information regarding last year closing stock which would help management to decide how much more goods are required to be produced to achieve the target sales. Statement of profit and loss would reflect the information regarding profit which can help in setting the target profit figure and would also help in planning the expenditure.