The Uses And Importance Of Balance Sheet, Income Statement And Cash Flows
To a business owner, the most important documents he wants to lay his eyes on are the financial statements. These documents are reports - on the performance and the result of business operations. This measures the profitability of the company as well as the gains in investment. This report, otherwise, called financial statements comprise of three important parts - the balance sheet, the profit and loss summary which is also called income statement and the cash flow. These three accounting documents will show the true and complete picture of the business.
The balance sheet is a reflection of the firm's assets, liabilities and owner's equity at a specific time. This is usually at the end of the accounting period, commonly on the midnight of December 31. The income statement is an indication of business profitability at a specified time - this could be the whole accounting period or a fraction thereof, say 3 months or quarterly. This will reflect the total revenues and expenses during any given period. The cash flows would indicate the change in cash and cash equivalents. The cash equivalents are divided into three categories - operating activities, investment activities and financing activities.
Who are interested in seeing the financial statements?
The business owners would want to look at the financial statements. This will tell them how much were the profits generated for the past business operations. This will also quantify the additional amount earned and re-invested. The balance sheet can give them an idea of possible expansion given the current resources. The income statement or also called profit and loss summary will indicate the amount of company earnings. And the cash flow will tell owners the amount which readily convertible to cash.
Creditors or lenders especially the banks, are so much interested in the performance of the business. There are times that the bank would require a complete financial statement for the past 3 or 5 years. The documents will serve as the basis for analyzing the need for financial assistance and the decision to grant loans to the company. Seldom would a bank extend credit to a losing company.
Suppliers of the business will also be interested in taking a look at the statements. This will enable the suppliers to gauge the capability of the company - would the firm be expanding to merit more supplies?
Investors also would like to see the company's financial statements because these will indicate the viability of the company. As it earns, it will surely continue with operation and the investments can be made use of.
Finally employees would also want to peep on the financial documents. This will tell the workers their chances of salary increases, grant of benefits and assurance for continuous employment.
Financial statements are really very important - not only to the owners but the general public as well. The documents may look simple but this is a reflection of the condition of the firm.
by: alona Rudnitsky