9 Things You Need To Know About Financial Statements

Financial StatementEvery business owners, company investors and board of directors would like to see how their company performing financially. A need for preparing financial statements becomes a routine part for any organization. These financial statements tell business owners, companies board of directors a true picture about the health of their organization. Therefore, interpreting and understanding these financial statements becomes important on the part of investors, owners and companies board of directors.

What is Financial Statements?

Financial statements are formal record of the financial activities and position of a business, person, or any organization or a legal entity. The financial activities are presented in a structured manner which is easy to read and understand by any individual. The key financial information’s are recorded either on:

  • Income Statement
  • Balance Sheet
  • Statement of Cash Flow

In this article, I will explain you what the financial statements have to offer and how to use them to work in your favor.

  1. Business Investor and Financial Analyst all use Balance Sheet, Income statement and Statement of cash flow before making any financial decision. These statements truly reflect the financial health of any organization. The other statements such as statement of owner equity, retained earnings are important too but not critical. Investors can refer them also to make their financial decision.
  2. The financial statements are widely used to develop a score card to help business owner to compare the score card with actual and make any decision if there is any variance between the score card and actual results. Financial Analyst prepares this score card based on the historical financial information presented by the company in the form of Financial Statements.
  3. The financial statements are widely used by financial analyst to calculate various financial ratios which tend to show an indicator of company present performance and where company is heading in the future. These financial ratios are often presented to board of directors or investors for review.
  4. An active investor likes to see these statements before investing in to company. The auditor of company uses these financial statements to prepare his audit report. The audit report can either be unaudited which is based on mid-year financial statement and final auditor report which is normally completed after the company financial reporting period ends.
  5. If the company owns several other subsidiaries companies, the financial statements can also be prepared as consolidated financial statement where it includes financial information of both parent company and all its subsidiaries companies.
  6. GAAP (generally accepted accounting principles) rules followed by majority of large companies which allow the company to prepare their financial statements according to GAAP. There are basically two conventions, one of historical cost and other one accrual accounting, according to GAAP, the assets are valued at their historical cost whereas revenues and expenses are recoded when they are incurred. Therefore, the investor should really need to understand the statement of cash flow of any organization to see health of the company performance.
  7. Income statement is another statement that cannot be overlooked by any investor. Income statement normally reveals the ability of a business of how much business generates a profit. On the other hand, it does not reflect how much of assets and liabilities business required to generate a profit.
  8. Investor or financial analyst can perform a variance analysis if they have the financial information’s to see some powerful indicator such as profitability trend, sales trend and revenue trend. These variance analyses help the investors to make their financial decisions.
  9. Cash flow statement is the most important financial statement for any business mainly because it focuses solely on changes in cash inflows and outflows over a period of time. This report presents investors a more clear view of a company’s cash flows than the income statement, which can sometimes present skewed results, especially when accruals are required to be maintained according to GAAP


An overview of the above financial statement helps the readers to see a bigger picture of the company. However, the beginning investor should also prepare to learn more about investment qualities before they invest in the companies.

Still confused about financial statement? Connect with online accounting tutor to understand more about financial statements and improve learning before investing.

Key Difference Between Income Statement, Cash Flow Statement & Balance Sheet

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:

Income Statement

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.

 income statement

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.

Read more – What is the difference between Cost accounting, financial accounting and Management accounting?

Balance Sheet

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.