Every company issues their financial statement at the end of each fiscal or financial year. These documents provide a summary of all revenue and expenses incurred by the business during this period. The audience for the financial statements includes company officers, investors, creditors, and customers.
A typical financial statement is comprised of three separate reports: income statement, balance sheet, and cash flow. These three documents provide a detailed view into company operations, volume of sales and overall management. In a publicly traded company, an independent accounting firm reviews these statements and an opinion on the accuracy of these reports is provided. This is called an audit opinion statement and is used to provide assurance that the company’s records are accurate.
An income statement provides details of the sources of income, amount received, and the total expenses in broad categories. Typically, income categories are sales revenue, investment revenue and services revenue. Expense categories include salaries and benefits, supplies and vehicles. The net income or loss value is the difference between the total revenue and the total expenses. A positive value is a profit and a negative value is a loss.
A balance sheet provides a more detailed accounting of all the different categories and the amount spent or received in each. It is on the balance sheet that a breakdown of equipment costs into fixed assets and consumables can be found. The purpose of the balance sheet is to obtain a more detailed picture of account activity.
The statement of cash flow is used to illustrate the current cash position, liquid assets, and accounts receivable. This report is a good indicator of the operational management of the company and the impact of their accounts receivable collection activities. A company can appear financially sound based on the income statement and balance sheets when it is not. A cash flow statement adds context to the reports and reflects the actual cash position.
The financial statement of a company provides a great opportunity to learn about the company’s finances. Take the time to compare the three main reports and read all the notes in the financial statements. These items provide context for the values on the statements and give an enhanced perspective on the financial health of the company. A professional financial analyst uses five key ratios and calculations to evaluate and rank the financial health of a company. The information provided in the financial statement is used in these calculations and is provided to investors and financial institutions.