An effective business management needs three very important financial statements that include income statement, cash flow statement and balance sheet. Indeed, all these three financial statements are typically produced with accurate financial information in order to make trustworthy & sound business decisions. Usually, these financial reports reflect the critical info about the different business activities like cash management, effects of business transaction during a particular period, revenues and expenses of a company, equity shares as well as the events on an entity. Each type of statement plays a significant role in a company; in fact these are the essential decision-making tools.
Let’s have a look at the key difference among these significant financial statements:
The statement that depicts financial sustainability assists to represent the current value of the business as well as describes the total profit over the costs of earning of a company for a given period of time. Indeed, income statement is a statement of operations that represent overall income, profit and loss of a business entity. The “Statement of Financial Performance” provides information relating to the sufficiency of the selling prices as well as the adequacy of the profit related to the business owner’s net investment. Along with the profitability, it also indicates how the company’s revenues are transformed into the net income.
Generally, this P&L statement (Profit and Loss Statement) is directly associated to the cash flow statement, balance sheet along with statement of changes in equity. One section of this statement includes details about the revenues & gains and another section includes details about the expenses and losses. The income statement shows a net profit, if gains & revenues are greater than losses & operating costs. On the other hand, in case of greater expenses and losses of the company, the income statement will show a net loss.
Cash Flow Statement
The statement of cash flow shows the details of cash funds that a company has taken in or disbursed to or from any another source over a specific period of time. In fact, it describes the source as well as application of received and distributed money or funds throughout the reporting period by comparing the opening balances with the closing balances on cash or cash equivalent accounts. Essentially, the cash flow statement includes all the details from the balance sheet and the income statement in order to give a summary of cash inflows and outflows related to the financing activities, operating activities and investing activities.
Indeed, this statement informs about the movement of cash funds in a specific period of time to the decision makers. By including details of all the cash activities during that period of time, cash flow reports are prepared at the end of an accounting period. In fact, the statement of cash flow is a mirror image of business or a company owner’s ability to pay its bills or invoices in the future.
The “statement of financial position” or a balance sheet identifies the financial strength of a company or business at a particular moment in a time. In financial accounting, it is a summary of the financial balances of a corporation, a sole proprietorship, a business partnership or other business organization.
A balance sheet is an essential statement that shows the real picture or snapshot of a company’s financial position and the exact value of the assets that an organization owns at a particular point in time. It is prepared either monthly or quarterly at the end of an accounting period.
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The key purpose of all these three aforementioned financial statements is to provide different types of details & appropriate information to financial decision makers that essential to run a company successfully. With the help of this unique, necessary and accessible information, the internal and external decision makers need to make decisions about the distribution of resources within their control. In this way, all the statements assist decision makers choose the most advantageous resource allocation option for their business or a company.