Financial statements are official records of commercial activities and the position of an organization, person, and business entities (Bekaert & Hodrick, 2017). The financial reports serve one primary purpose, “showing people the money.” They document the details of the source of a company’s money, how it was utilized and where the finances are at the present moment. Four main types of financial statements exist, namely, cash flow statements, balance sheets, and statements of the shareholder’s equity and income statements. The paper summarizes these four different kinds of financial records, giving the functions of each in a firm.
A balance sheet shows the amount of money owned by the company and the debt it owes to the firm for a fixed period. It offers detailed information concerning the liabilities, assets, and shareholders’ equity of a company. Assets are the valuable things owned by the company and are usually sold or utilized in the production of goods and services. Examples of assets include equipment, plants, trucks, and inventories. Liability is the amount of money an organization owes to others. For instance, a bank loan utilized to launch a new product is an inventory. The shareholders’ equity is the amount of money that would remain if a firm decided to sell all its assets and clear all its liabilities.
The Debt/ Equity (D/E) ratio is calculated by dividing the total liabilities of a company by the stockholders’ equity. The D/E ratio is used to measure the financial leverage of the firm (Bekaert & Hodrick, 2017). The working capital is wealth obtained from the company and is useful in carrying out day-to-day operations for the firm. The capital is calculated by subtracting current liabilities from the current assets. Current vs. long-term debt is the primary portion of an obligation that needs to be paid in one year of the balance sheet. The Enterprise value is a measure of the total value of the company (Bekaert & Hodrick, 2017). The balance sheet can be summarized as follows;
ASSETS= LIABILITIES + SHAREHOLDERS’ EQUITY
An income statement is a financial report showing the amount of revenue generated by a company in a given time. Besides, it portrays the expenses and costs arising from revenue earnings. The statement’s bottom line describes the firm’s net earnings or losses. Furthermore, income statements provide reports of earnings per share (EPS). The EPS shows the amount of money that would be received by the firm’s shareholders if the company decided to distribute all its earnings. The amount of money arising from sales of goods and services forms the top of the income statement. The line drawn at the top shows gross sales and revenues.
The cash flow statements are financial reports used to show the outflow and inflow of cash in a company. The document is essential because for any viable business must have enough money to purchase assets and pay for its expenses. The cash flow statement is used to determine whether the firm generates money. The report reorders and utilizes data from the company’s balance sheet and income statements. The records are composed of three parts, which review cash from three different types of activities. These include financing, operating and investing activities.
I would recommend that organizations use financial statements efficiently because they show the sources of the company’s funds, the manner in which the finances are utilized, and the financial position of the enterprise. Therefore, it will be easy to point out when a company is making a loss or a profit. A company making a loss can quickly identify the weaknesses and recover in the shortest time possible.
Reference
Bekaert, G., & Hodrick, R. (2017). International financial management. Cambridge University Press.
