Financial statements are defined as formal records describing business activities and financial performance (David, 2013). Financial analysis is a tedious but necessary task: the survivability of business depends on the decisions many of which are driven by the information found in financial statements. Formal records are useful for projected financial statement analysis because they allow for observing trends and tendencies as well as anomalies and abnormalities. While a good share of future events is likely to remain outside a business owner’s grasp, some predictions can still be made, which enables more security and certainty about what is coming. For example, financial statements can provide grounds for allocating human resources, continuing or discontinuing business activities, and purchasing or renting equipment and raw materials.
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There are at least three types of financial documents that can be used for projected financial statement analysis: the balance sheet, the income statement, and the cash flow statement (Williams & Dobbelman, 2018). The balance sheet provides a summary of the financial balances at any given moment in time. From this type of statement, a business owner can assess the strength of his or her business. It allows for a deeper insight into a business’s capacity to manage changes in revenue and stay afloat despite the volatility. The income statement displays profits and losses over the span of a certain period, which allows one to make predictions for the future. Lastly, businesses use cash flow statements for projected financial statement analysis. This type of statement provides information regarding the inflows and outflows of cash. William and Dobbelman (2018) note that while often overlooked, the cash flow statement can help with the assessment of how healthy a business is as it reflects its capacity to internally generate sufficient cash.
David, F.R. (2013). Strategic management concepts: A competitive advantage approach. Pearson.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book Chapters, 109-169.