All companies whether small or big prepare financial statements. These are very important to assess the financial condition of the company. All important stakeholders of the company use these to make decisions. The stakeholders are the company’s management, creditors, shareholders, the government and its competitors.
Companies prepare quarterly and annual financial statements. These show the monetary figures for the said period. Financial statements that draw contrasts with the past are called comparative financial statements. There are four main types of financial statements.
A balance sheet represents a still snapshot of the company’s financial position at any given point of time. The balance sheet contains monetary information on the company’s equity capital, liabilities and assets. The assets are the belongings of the company. These are classified into long-term and short-term assets. The long-term assets include items like land, buildings, plant, machinery and equipment. Short-term assets are all those assets that the company holds for terms less than a year. These are cash, stock and bills receivable. Liabilities are also classified in a similar manner. Short-term liabilities include bills payable and accrued taxes. Long-term liabilities are loans, debentures and mortgages. Equity is bifurcated into common shares and preferred shares.
Income and Expenditure Statement
This statement shows the company’s movements during the period. This shows all the income earned by the company and expenditures. When income exceeds expenditures, the company is said to have made a profit. When expenditures are in excess of income, the company would have incurred a loss.
This statement is prepared for all operating and non-operating monetary items. The statement represents figures in both gross terms as well as net terms. The gross sales amount does not show the costs incurred by the company, whereas the net sales amount accounts for all the expenses sustained.
Cash Flow Statement
The cash statement is prepared to track the inflows and outflows of cash during the statement period. This way, the company is able to assess its cash position at the moment. There are three main heads of the cash flow statement. The first one is the operating cash flows. This shows all the money that the company realized as a result of its operations, and also shows all the costs that the company incurred for its production processes. The investing cash flow segment shows all the purchases the company made and the money it realized on the sale of any assets. The financing cash flow segment shows all the additional debt obtained during the statement period. Outside investments made by the company are also shown.
Statement of Retained Earnings
Many times, the shareholders are not paid all the profits made by the company. The management opts to retain some money in the business. The money is utilized for financing its operations, researching developing the product further and for growth and expansion plans.
This statement shows the extent of money plowed back into the business. It also shows the dividends paid by the company during the period of the statement. The amount of retained earnings at the beginning of the period and at the end of the period is shown.