Financial Statement — Microsoft Excel
In this article, we will walk you the outstanding journey of learning financial statements and we also understanding the importance of financial statements in a company and we also cover how we identify the company’s financial health and what it says about our expenses and other factors that vary.
Introduction
Reading financial statements is a crucial skill for any accounting and finance professional, as they want to review one’s financial health.
Now, we will learn what a financial statement is and get to know the types of financial
statements, and their structure and components. We will also get familiarized with financial terms that will be used further.
What is Financial Statement
Financial statements are formal records of the financial activities and position of a business, person, or other entity. A financial statement is a collection of the
financial information of a business and it reveals the financial health of a business. In financial statements businesses report both the individual line-by-line items and the total amounts to provide a comprehensive view of their financial performance.
The line-by-line items include various accounts and transactions, like revenues, expenses, assets, and liabilities. These items are presented in a structured manner
that allows readers to understand the company’s financial position, operations and cash flows. In addition to the detailed information financial statements also include the total amounts or summary information, like net income, total assets and
total liabilities to give an overall picture of the company’s financial health.Financial statements include true statements of the company’s operational budget, assets, expenses, liabilities, earnings and the net worth of liabilities and assets. Financial
analysts, accountants, investors, and planners use these statements to enable decision making expansions, future planning, fundraising, market launches and such.
There are three important financial statements are listed below:
- Balance Sheet
- Income Statement
- Cash Flow Statement
- Each type of financial statement reports different types of information for a period
for example, month, quarter or year. Using financial statements gives you insight into several areas of your business’s financial health.
Here’s the breakdown of what each financial summary reveals:
Income Statement: Business’s profits and losses.
Balance Sheet: Business’s assets, liabilities and equity.
Cash Flow Statement: Business’s incoming and outgoing money.
Who needs the Financial Statements of a Business/Company?
The persons, entities listed below want to look at the financial statements of a business/
company:
Investors: Investors want to know about the financial health of a business.
Banks and Lending Institutions: They want to know whether a company can repay loans.
Creditors: Creditors want confirmation before lending credit to a business.
Government: Governments want to derive information about the taxes to be collected from a business.
Employees: Employees of a company want to know how well the company is doing, salary, bonus and increment.
Managers: Managers want to get information about the performance of a business.
Auditors: Auditors to give a report that is an independent opinion on the company’s position.
Advantages and Disadvantages of Financial Statements
Financial statements have their own advantages or advantages and disadvantages. Let’s look at them.
Advantages
Historical and Factual Perspective: A financial statement provides a historical and factual perspective.
Status of a company: It provides information about past performance and the company’s current situation.
Business Operation: It helps one know the ability of a business to complete business transactions make profit and so on.
Loan Repayment: It helps creditors know whether a business can repay its debts/
loan or credit.
Growth: It helps track and analyze the development of a business with previous periods.
Disadvantages
Based on past data: Financial statements are based on past data.
Based on the pattern of the Market Data: Financial statements are based on the practice of the market data, which means we cannot compare a manufacturing
company with a service provider or a showroom of laptops and mobiles with a company of book publishing.
Biased Information: Some of the information in financial statements is window
dressing to attract investors, banks and creditors.
Incomplete Information: We can’t know a business’s working style, management behavior, relationship with parties like investors, banks, creditors and employees and so on by looking at financial statements.
Conclusion
Finally, we will reach end in our learning journey and understanding the pillar concepts of financial statements that how it important for a company, why we make it and what it says about our business financial situation. Whenever we want to analyze our business and it’s workflow performance, than we make a financial statements that help us to see, what’s going wrong in our business and provide a recap of it so we rectify our wrong strategies.
