A complete set of financial statements includes a statement of financial position, a statement of profit and loss, a statement of cash flows and a statement of changes in shareholders’ equity. In a financial glossary, terms such as “balance sheet,” “report on financial condition” and “statement of financial position” are interchangeable.
Statement of Profit and Loss
A company lights up the competitive stage with unrivaled performance and consistent profits -- or net income, as finance people say when corporate revenues exceed operating expenses. Revenues come from the provision of services, the sale of goods or both. Expenses incorporate any element a business spends money on, from material cost to selling, general and administrative charges -- including things like salaries, shipping and rent. Curbing expenses and increasing revenue is the equation that corporate profitability specialists must resolve, lest the company’s popularity dwindle in the hearts and minds of investors and business partners -- such as customers, vendors and service providers.
A statement of financial position shows assets, liabilities and equity items -- a trifecta that helps determine an organization’s solvency. A cash-strapped company -- that previously was profitable -- may use its balance sheet to reinvent itself operationally, attract new investors and recapture its early momentum by showcasing its strengths. The business may do so by adeptly using balance sheet items, running the gamut from cash and merchandise to customer receivables, long-term assets and intangible assets. For example, the business could buy state-of-the-art equipment and production machinery to revamp its manufacturing process, automate quality checks and increase outputs. The organization also might tell investors that it has fewer debts than rivals, after which financiers -- if convinced -- could pour money into operating activities. The last scenario gives rise to equity, also referred to as investors’ money.
Statement of Cash Flows
A positive statement of cash flows -- one with a cash surplus at the bottom -- is proof that a company’s senior executives are properly managing operating coffers and that their liquidity policies are working. The term “liquidity” deals with tools and strategies corporate leaders rely on to keep vaults flush with capital. A liquidity report -- the other name for a statement of cash flows -- offers a glimpse into the way department heads manage cash flows from operating, investing and financing activities.
An equity statement is the same thing as a “statement of changes in shareholders’ equity” or “report on retained earnings.” This financial data synopsis displays money investors put into a company’s cellars, as well as financial rewards the business periodically sends corporate owners. Besides dividends and common equity, an equity statement also incorporates additional paid-in capital, repurchased shares and accumulated profits -- or retained earnings.
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.