Introduction
In the industry, business organizations, regardless of their size, keep written records that depict operational activities, including assets, liabilities, and even the details of associates. Financial statements (FS) serve significant roles in showing managers the current financial position and the business’s overall performance in the market. The FS encompasses a statement of cash flow (SCF), balance sheet, and income statement, which provide deep insight into the financial health of the respective company.
Purpose of the Income Statement and Types of Expenses
Generally, FS plays a significant role for the company’s shareholders, including managers, lenders, and business owners. It gives the associate a quick snapshot of the firm’s financial health based on its operations (Palepu et al., 2020). In other words, FS provides information concerning the corporation’s profitability, debt, expenses, and revenue. A typical income statement contains the following expenses: employee wages, electricity bills, sales commission, transportation, depreciation, administrative expenditures, rent, insurance, maintenance, cost of goods sold (COGS), amortization, and interest paid on debts.
Purpose of the Balance Sheet, Types of Assets, and Creditors’ Claim
A balance shows the company’s financial position at a particular time, especially at the end of the fiscal year. It enables management to perform the financial assessment by determining the ability of the firm to meet its obligations. The types of assets in a balance sheet include buildings and equipment, vehicles, furniture, inventory, cash and cash equivalents, and patents. Similarly, claims to creditors are loans, mortgages, accrued expenses, accounts payable, and deferred revenues. Likewise, the owners’ claim in the statement of financial position is the capital.
Three Accounts of Shareholders’ Equity
In the FS, three accounts combine to form the owners’ equity. They include common stock, treasury stock, and preferred stock. The common stock mainly denotes the contribution or investment of shareholders in the business in the form of capital. It gives the contributors the right to own a portion of the company in terms of shares purchased by the respective individual.
On the other hand, the treasury stock represents a contra-equity account (Palepu et al., 2020). The preferred stock is more like the common stock; however, the difference is that it does not guarantee shareholders the right to vote. In the case of dividends, investors receive cumulative dividends, especially when they are not paid at the end of a financial year.
The SCF and Its Sections
The SCF is an FS that majorly depicts the movement of cash coming in and the cash going out (cash and cash equivalents) of the business organization. In other words, it shows how the company manages its finances while paying its obligations and generating funds from various operations. The SCF is categorized into three classes, namely, financing activities, investing activities, and operating activities. The cash flow from financing activities encompasses various sources of funds, such as banks and investors, and different approaches in which cash is paid to shareholders, which include dividends, repayment of loans, and payment of stock purchases.
On the other hand, cash from investing activities comprises uses and sources of funds for investment purposes (Maheshwari et al., 2021). They are sales or purchases of company assets, loans received, and acquisition payments. Lastly, cash flow from operating activities comprises uses and sources of funds for business activities. They include interest payments, sales receipts, salary and wages, rent payments, and income tax settlements.
Conclusion
Managers, investors, and other stakeholders use FS records to assess and understand a business organization’s performance. When individuals have adequate information about the FS, they can easily examine and determine the business’s financial health. For the management body, details of the balance will allow them to compare the corporation’s performance to its competitors in the same sector.
References
Maheshwari, S. N., Maheshwari, S. K., & Maheshwari, M. S. K. (2021). Principles of Management Accounting. Sultan Chand & Sons.
Palepu, K. G., Healy, P. M., Wright, S., Bradbury, M., & Coulton, J. (2020). Business analysis and valuation: Using financial statements. Cengage AU.