What Is in a Financial Statement?
Financial statements provide a look inside the operations of a business, much like an x-ray reveals problems that may be occurring inside of a human body. Anybody can learn how to read financial statements, and a good business owner or manager should do his best to study the statements on a regular basis. Regular review will help you to proactively deal with any concerns that come up before they become big problems.
Other People Are Reading
-
Assets
-
The assets that you own through your business are shown on a balance sheet. Assets are either current assets or non-current assets. Current assets consist of cash or items that are easily converted to cash. In fact, most businesses expect to convert their non-cash current assets to cash within one year. Non-current assets are items that the business expects it to take longer than one year to convert, or are harder to sell. Fixed assets are considered non-current assets, but they are not for sale, because they are used in the operation of the business.
Liabilities and Equity
-
Liabilities and equity occupy the other side of the balance sheet from the assets. Liabilities are split up into current liabilities and long-term liabilities. Current liabilities are much like current assets in that they are shorter term in scope. Most companies expect to pay off their current liabilities within a year, with long-term liabilities, such as a mortgage, taking longer. Owner's or shareholder's equity represents the amount that the owners of the business have as their total investment, or the assets less the liabilities.
-
Profit and Loss
-
The profit and loss statement shows if your business made money over a certain period of time, such as a particular month or year. The statement starts off with all the sales your business has made, or the gross revenue. After this, you subtract certain expenses, such as any discounts given, and the cost of any merchandise or service that you sell. The remainder after you subtract these items from revenue is the gross profit. Other expenses that are part of the normal operating cost of the business, such as rent and office supplies, are subtracted from the gross profit, to arrive at a net profit or loss amount.
Cash Flow
-
A cash flow statement is used to measure how much cash is moving into or out of the business. An income statement only shows profit, but it doesn't show if the business has enough money on hand to pay its bills. A cash flow statement usually looks at changes over a certain period of time in the cash balance. Positive cash flow means the business is gaining cash. Cash flow statements measure cash movement from operating activities and investing activities. They also measure cash flow from financing activities. If you borrow money, it is positive cash flow from financing, but it has no affect on the profit or loss.
-
