Financial statements The accounting and financial forecast of any type of firm is done using financial statements. Financial statement refers to a quarterly and annual economic report or record that provides quantitative information about an individual’s, a company’s, or business’s financial condition.
In other words, It is a summary of an organization’s transactions over a period of time. Financial statements are used by business owners, investors, creditors, and others to evaluate past performance and make decisions about the future. The purpose of financial statements is to provide information that is useful in making business and economic decisions.
They are typically composed of four parts:
– Balance sheet: a snapshot of the firm’s assets, liabilities, and equity at a given point in time.
– Income statement: also called the “profit and loss statement,” this reports on the firm’s profitability over a period of time.
– Statement of cash flows: this tracks the firm’s cash inflows and outflows over a period of time.
– Statement of shareholders’ equity: this reports on the changes in the firm’s equity over a period of time.
According to the majority of specialists, there are usually three financial statements in a company’s report: an income statement (Pro Forma Profit and Loss), a balance sheet, and a cash flow statement. Despite their differences in nomenclature, these three financial statements are quite interrelated.
A successful business is the one whose financial records show a good business performance by means of all the three sorts of statements. Each of these statements has its unique features and characteristics.
An income statement (also called a profit and loss statement) is a report that shows whether your company made money or lost money during a specific period of time. The income statement also reports the revenue and expenses for the period. The purpose of an income statement is to show whether your company is profitable or not.
A balance sheet is a report that shows what your company owns (assets) and what it owes (liabilities) at a specific point in time. The purpose of a balance sheet is to show the financial health of your company.
A cash flow statement is a report that shows how much cash your company has on hand. The purpose of a cash flow statement is to show whether your company is generating enough cash to pay its bills.
There are many different types of accounting, but the three most common are financial accounting, managerial accounting, and tax accounting. Financial accounting is the process of recording, classifying, and summarizing financial transactions to provide information that is useful in making business decisions. Financial statements are the primary products of financial accounting.
Managerial accounting is the process of identifying, measuring, analyzing, and communicating information that helps managers make decisions to fulfill an organization’s goals. Managerial accounting reports are typically used internally by management to make decisions about how to run the business.
Tax accounting is the process of preparing, filing, and paying taxes. Tax accounting reports are typically used by businesses to prepare their tax returns. There are many different types of accounting software, but the three most popular are QuickBooks, MYOB, and Xero.
QuickBooks is the most popular accounting software for small businesses. It is easy to use and has a wide range of features. MYOB is a popular accounting software for medium-sized businesses. It has a wide range of features and is easy to use.
Xero is a popular accounting software for large businesses. It has a wide range of features and is very user-friendly.
Income statement A company’s Income Statement shows how much money it makes. It only includes Sales, Costs, Expenses, and Profit for this report. The information on the flow of transactions over a specific period of time, such as a month, a quarter, or even several years is shown in the income statement.
The purpose of an income statement is to show how much revenue and profit a company has earned during a specific period of time. The main goal of this financial statement is to help business owners, shareholders, and investors make decisions about the company.
An income statement can also be used to compare a company’s financial performance against other companies in its industry. This comparison can be done by looking at ratios like gross margin, operating margin, and net margin.
The income statement is a financial report that shows the revenue earned by a business in a specific time period. To put it another way, the income statement depicts inflows and outflows of assets, which are revenues and expenses, respectively. Net income is the difference between inflows and outflows; if there is more inflow than outflow, it’s called net profit; if there is more outflow than inflow, it’s known as net loss (net).
Income statement equation can be expressed as:
Revenue – Expenses = Net Income/Loss
Now, let’s have a look at the components of income statement in detail.
Revenue: Revenue is an earning or inflows of assets within a specified period of time. For instance, if a company sells its product worth $100,000 in cash, then it will recognize this amount as revenue in its income statement. It is important to note that not all revenues are cash receipts. Some revenues are also earned on credit basis, which means that payment for such revenues is due after a certain period of time. In simple words, when a company provides services or sells products and gets payments later, then such type of revenue is termed as credit revenue. Accounting standards generally prohibit the recognition of such type of revenue until it is realized, which means that payment is received.
Expenses: Just like revenues, expenses are also outflows or expenditures within a specified period of time. For example, if a company spends $10,000 on purchasing raw materials, then it will recognize this amount as an expense in its income statement. It is important to note that not all expenses are cash payments. ‘
Some expenses are incurred on credit basis, which means that payment for such expenses is due after a certain period of time. In simple words, when a company incurs expenditure and makes payments later, then such type of expense is termed as credit expense. Accounting standards generally prohibit the recognition of such type of expense until it is incurred, which means that payment is made.
Net Income/Loss: Net income or net loss is the difference between total revenue and total expenses. If inflows are greater than outflows, then it results in net income, whereas if outflows are greater than inflows, then it results in net loss. For instance, if a company’s total revenue is $1,000 and its total expenses are $500, then its net income will be $500 ($1,000 – $500). Similarly, if a company’s total revenue is $500 and its total expenses are $1,000, then its net loss will be $500 ($1,000 – $500).
Earning per share (EPS): EPS is a financial ratio, which is used to calculate the amount of earnings per outstanding share of common stock. In other words, EPS is a profitability ratio, which demonstrates how much profit a company has generated for each share of common stock. Generally, EPS is calculated on annual basis, but it can also be calculated on quarterly or half-yearly basis.