Financial statements are written records that illustrate the business activities and the financial performance of a company. In most cases they are audited to ensure accuracy for tax, financing, or investing purposes.
A Methodical Approach to Assessing the Financial Health of a Company Using Financial Statements.
Balance Sheet is a snapshot at a point in time. On the one side you have the company’s assets and on the other side its liabilities and Shareholders’ Equity (or Net Worth). The assets and liabilities are typically listed in order of liquidity and separated between current and non-current.
The income statement covers a period of time, such as a quarter or year. It illustrates the profitability of the company from an accounting (accrual and matching) perspective. It starts with the revenue line and after deducting expenses derives net income.
The cash flow statement look at the cash position of the company .
It answers the questions ; How much of the organization's cash goes to its creditors and shareholders? Does it keep enough for its own investment and growth? has 3 components cash from operations, cash used in investing, and cash from financing.
Balance sheet
The Balance Sheet has 3 Categories-
Assets- An asset is an item that the company owns, with the expectation that it will yield future financial benefit. This benefit may be achieved through enhanced purchasing power (i.e., decreased expenses), revenue generation or cash receipts.
Liabilities- The opposite of assets are liabilities. Liabilities are amounts that the company owes and will have to settle in the future.
Equity- Equity is the amount of capital invested or owned by the owner of a company. The equity is evaluated by the difference between liabilities and assets recorded on the balance sheet of a company. It Includes Share capital and Retained Earnings.
Equity= Assets-Liabilities
SAMPLE BALANCE SHEET
Liabilities | Amount | Assets | Amount |
Shareholders Equity |
| Non Current Assets |
|
Common Shares | 89,000 | Property plant & equipment | 1,10,000 |
Retained Earnings | 11,000 | Intangible assets | 10,000 |
Non Current Liabilities | Total Non-Current Assets | 1,20,000 | |
Other Non-Current Liabilities | 11,000 | Current Assets | |
Bank Loan | 1,00,000 | Cash | 20,000 |
Total Non Current Liabilities | 1,11,000 | Account Receivables | 3,000 |
Current Liabilities | Inventory | 60,000 | |
Accounts Payable | 2,000 | Prepaid Expenses | 11,000 |
Accrued Expenses | 1,000 | ||
Total Current Liabilities | 3,000 | Total Current Assets | 94,000 |
Total Liabilities | 2,14,000 | Total Assets | 2,14,000 |
Income Statement
An income statement also Known as Profit and loss Statement is a statement that shows you the company's income and expenditures. It also shows whether a company is making profit or loss for a given period. The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business.
Income Statement has 3 Main Sections-
Revenue: Also known as sales, revenue is the amount of money a company has earned by selling its products and services in the period. The revenue amount includes only money made from core activities of the business—those related to its primary operations. For example, if a company manufactures industrial machines, its revenue would include earnings from that activity. It wouldn’t include money earned from selling building or financial investments. These are recorded elsewhere in the income statement.
2. Expenses:
Cost of goods sold/cost of sales-The cost of goods sold (for manufacturing companies) or cost of sales (for retailers and wholesalers) is all the direct costs associated with making or acquiring the company’s products and/or offering its services. The amount typically includes raw materials and labour along with amortization expenses. It doesn’t include indirect costs, such as administration, marketing, sales or distribution.
Operating expenses- Operating expenses (also called selling, general and administrative expenses, or SG&A) are the indirect costs of running the business. These may include:
marketing and advertising
insurance
office supplies
maintenance and repairs
employee benefits
accounting and legal fees
property taxes
rent and utilities
3. Profit and Loss: : Calculated by subtracting total expenses from total revenues. If revenues exceed expenses, it results in a net profit; otherwise, it indicates a net loss.
SAMPLE INCOME STATEMENT
Sr No | Particulars | Amount |
Revenue | ||
Sales from Revenue Stream 1 | 35,00,000 | |
Service charges from Revenue Stream 2 | 40,00,000 | |
A | Total Revenues | 75,20,000 |
B | Other Income | |
Interest | 20,000 | |
Cost of Sales | ||
Direct Cost 1 | 18,70,000 | |
Direct Cost 2 | 14,02,000 | |
C | Total Cost of Sale | 32,72,000 |
D | Gross Profit (A+B-C) | 42,48,000 |
Selling, General & Administrative Expenses | ||
Management and office salaries and benefits | 6,69,999 | |
Advertising and marketing | 1,35,000 | |
Bad debts | 10,000 | |
Office and general | 75,000 | |
Occupancy | 45,000 | |
Professional fees | 35,000 | |
Insurance | 22,000 | |
Repair and maintenance | 17,500 | |
Utilities | 5,600 | |
E | Total SG&A Expenses | 10,15,099 |
F | Profit Before Interest and Depreciation (D-E) | 32,32,901 |
Interest & Depreciation | ||
Interest | 1,03,900 | |
Depreciation | 1,45,000 | |
G | Total Interest & Depreciation | |
H | Profit Before Taxes (E-G) | 29,84,001 |
I | Income Tax | 8,95,200 |
J | Profit After Tax (H-I) | 20,88,801 |
Cash flow statement
Statement of cash flows demonstrates:
• Where cash is being generated
• Where cash is being used in the business
Understanding a cash flow statement involves analyzing cash from operating, investing, and financing activities to assess a company's ability to generate positive cash flows and meet its financial obligations.
Methods of Preparation of Cashflow Statement
Direct Method Vs Indirect Method
Direct Method | Indirect Method |
Operating Activities | Operating Activities |
Cash Collected from Customers | Net Income |
Cash Paid to Suppliers and Employees | Addback: Depreciation and amortization expenses |
Cash Flow from Operating Activities | Cash Flow from Operating Activities |
Investing Activities | Investing Activities |
Purchase of Equipment | Purchase of Equipment |
Disposal of Property | Disposal of Property |
Cash Flow from Investing Activities | Cash Flow from Investing Activities |
Financing Activities | Financing Activities |
Issuance of Shares | Issuance of Shares |
Repayment of Loan | Repayment of Loan |
Cash Flow from Financing Activities | Cash Flow from Financing Activities |
Net Movement of cash | Net Movement of cash |
Direct method of cash flow starts with cash transactions. (Transactions are separated into cash received and cash paid.) | Indirect method of cash flow starts with net income.(Non-cash adjustments are then added.) |
Understanding these statements is crucial for investors, creditors, and management to make informed decisions about the entity's financial health and performance.
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