Financial reports are management tools prepared to represent as accurately as possible the status of a company's health. There are three component reports that provide a complete picture of the company's financial health. They are the income, cash flow and balance sheet statement.
Balance Sheet Statement
A balance sheet is the statement of the assets, liabilities and net worth of a company on a particular day, expressed in dollar amounts. A balance sheet may be certified by outside accountants or prepared internally.
Cash Flow Statement
The cash flow statement reflects the net change in the cash between the company and the outside world. The cash flow statement ignores most accounting distortions. It is the easiest measure of the health of a company.
The income statement demonstrates where in the corporate structure the net cash flow changes occurred. The income statement can specify whether cash flow improved as a result of increased sales, cost efficiencies, the drawdown of inventories or the sale of assets.
All Three Statements Make a Complete Financial Report
A balance sheet tends to reflect longer term effects of corporate decisions because the balance sheet accounts for the life of assets and the multifaceted costs of inventory. The cash flow statement only reflects the net change in cash from the last statement. The income statement details the nature of the cash change.
When to Use a Specific Statement
Managers trying to understand how a company allocates assets profitably would concentrate on balance sheet data. A potential acquirer would want to see the income statement to examine the quality of cash flows that contribute to profitability. The cash flow statement is regularly used by the treasurer to monitor the immediate cash flow needs of the company.
Publicly Traded Companies Must Present All Three Statements
Publicly traded companies must present all three statements when reporting quarterly and annual reports. These reports must be certified by a public accountant. It is the combined value of these reports that present a complete quantitative picture of the company as of the date specified.
Financial Report Should Be Measured Used with Fundamental Research
The combined statements do not provide any information as to the state of competitors, the industry or broad market trends. These statements must be studied to reveal the competitive position of the company.