Question

Say in your words the usefulness of cash flow, Income statements and Balance sheet

Answer 1

Balance Sheet : The balance sheet is the only one that shows the financial health of a company at a given moment. Instead of listing your business’s income and expenses like the P&L does, the balance sheet is a two-sided chart with three components (Assets on one side and Liabilities and Equity on the other):

One side lists the value of what you owe (your liabilities) and any owner equity (including your retained earnings) while the other lists the value of what you own and who owes you (assets).

The total of each of the two sides of the balance sheet should show the same amount to evaluate whether your balance sheet is properly balanced–accountants LIVE by this formula. To determine the relationship between the three amounts, accountants use a simple equation:

For corporations, the equation looks like this:

Assets = Liabilities + Shareholder’s Equity

And for sole proprietors and partnerships, it looks like this:

Assets = Liabilities + Owner’s Equity

Income Statement : Income statement shows your revenue, costs, and expenses during any given period of time. The P&L is the best view into your bottom line, or net income, which is why it’s typically used to show business lenders and investors whether your company has made or lost money during a given period.

Your business’s net income is also what will be used to determine its taxable income each year. This is calculated by subtracting your business’s expenses from its total revenue, which you can find using your P&L.

Cash Flow Statement

Your cash flow statement shows each and every one of your company’s incoming and outgoing transactions—how you’re spending your money and how you’re earning your income—over a period of time. The cash flow statement takes your business’s net income (from your P&L, remember?) and takes any non-cash transactions into account from operations, investing or financing activities to give you a picture of exactly what happened to company’s cash during that period.

So, if a company gets $1M in capital, but their P&L shows a net income loss of $50k during the same period, their cash flow statement will show a $950k net increase in cash for that period.

From there, your cash flow statement provides a more comprehensive view of how your business operates, where it’s making money, and how you make choices about expenses. For this reason, investors typically scrutinize the cash flow statement.

A cash flow statement accounts for three types of activities:

• Operations: the business functions you need to operate, including accounts receivable, accounts payable, and inventory.
• Investing: long-term changes to equipment, acquiring or selling assets, etc.
• Financing: acquiring debts, repaying loans, etc. which don’t affect your bottom line, but they do affect the amount of cash in the bank!