As a line manager, department head. Entrepreneur or financier, you will at some point find yourself having to analyze a spreadsheet or have some form of financial recording to do as part of your Job description. Spreadsheets, budgets, cash flow projections, business statistics, figures and the financial side of a business is not Just meant for accountancy experts. Many are baffled by balance sheets, or confused by the financial statements of a business entity.
This article therefore takes us through the basic terminology and knowledge to enable us understand and interpret effectively financial statements. For any thriving business, financial management is a crucial aspect. The goal of every organization Is profit minimization, or stockholder wealth minimization. These goals will entirely depend on solid financial decisions. To make good decisions, management needs good information. And that information comes from the accounting system.
An accounting system generates various financial reports. On a click, the system generates the four main financial statements: The Profit & Loss statement, Balance sheet, cash flow statement and the statement of changes in Equity. Other important reports include Sales analysis, Customers and Suppliers analysis, Debtors and Creditors aging analysis. These reports contain Important Information about the organization’s operating results and financial position. This information Is important for effective management, and financial control.
As a manager, or any other person with financial responsibility, you have to e able to interpret this information yourself. The relationship between certain Items of financial data can be used to identify areas where your firm excels and, more Importantly. Where there are opportunities for Improvement using, understanding. And interpreting these statements will help you make much better business decisions. The Basic Financial Statements Financial statements are written reports which describe a business’ financial performance and resources at a given time.
The most common financial statements re: Income Statement (Statement of Profit and Loss, Statement of Earnings). Balance Sheet (also known as a Statement of Financial Position). Cash Flow Statement. While these statements look at different aspects of the company, they are Interrelated and dependent on each other, as Information from one Is needed to prepare the others. The key to understanding accounts is to have a good grasp of what the basic statements are there to do, how they are prepared, what they tell you, and what they don’t. . Income Statement: It’s a financial statement that measures a Meany’s financial performance over a specific accounting period. It summarizes the revenues, expenses and profitability of a business In a given period of erne. It includes sales (or revenue), cost of goods sold, operating expenses, gains and losses, other revenue and expense items that are unusual, and income tax expense. It is also known as the “profit and loss statement” or “statement of revenue and expense”. II.
Balance Sheet: It’s a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance well as the amount invested by the shareholders. It is also known as Statement of Financial Position. The balance sheet must follow the following formula: Assets = Liabilities + Shareholders’ Equity iii. Cash flow Statement: It is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
The statement provides a summary of all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period. The cash flow statement tells you the sources and uses of cash during the period. It also provides information about the company’s investing and financing activities during the period. Lb. Statement of changes in Equity: A financial statement that shows all changes in owner’s equity for a given period of time.
The purpose of the statement of changes in equity is to provide readers with the useful information on how the capital or fund of an entity is utilized and used. Since it shows the movements of equity and accumulated earnings and losses, the readers can depict on where the company’s equity came from and where did it go. Investments and withdrawals may be made at any point during the period by the owner of the company. Investments and profits increase the owner’s equity while withdrawals and losses decrease the owner’s equity. By: William Kirby, Financial Analyst, PUP Limited
