Accountants use financial statements for measuring and monitoring business performance, as evidence of a business’s value, and at tax time.
The three most important financial statements are the balance sheet, income statement and statement of cash flow. The balance sheet is a snapshot of a business’s financial position at a point in time. The income statement provides a summary of revenue, expense and profit for a defined time period, usually a month, quarter or year. The statement of cash flow is a summary of cash inflow and outflow by source for a defined period.
With Flare, small business owners can easily use financial reports and statements in the same way as accountants, or invite their accountant or bookkeeper to analyze the data they contain. Flare’s interactive statements and reports will provide valuable insight into your business’s financial performance.
A balance sheet shows the financial positon or strength of a business at a point in time. It summarizes a company’s assets, liabilities and shareholders’ equity. Typically, business owners, managers, lenders and creditors use a balance sheet to assess the financial risks and liquidity of a business.
Assets: Everything a business owns that could generate current or future economic value.
Short-term assets: Assets which are liquid in nature and can be converted into cash within one fiscal year. Short-term assets include cash, short-term investments, accounts receivable and inventory etc.
Long-term assets: Assets which are not expected to be turned into cash or be otherwise disposed or consumed within one year of the balance sheet date. Long-term assets include long-term investments, property, plant, equipment, and intangible assets, etc.
Other assets: Long-term assets that are not investments, property, plant, equipment, or intangible assets. An example is intangibles such as goodwill, technology licensing fees, bond issue costs etc. Typically, except for goodwill, other assets are amortized to expense over the economic life of the assets.
Liabilities: Obligations of an entity: amounts owed to lenders, suppliers employees etc. Liabilities include unpaid vendor bills (unpaid balances on Accounts Payable accounts), loans, mortgage, unpaid taxes, bonds etc.
Short-term liabilities: Obligations which are due within one accounting cycle. Examples of short-term liabilities are accounts payable, taxes payable, unearned revenues, current purchases, loan payments due within one year, vendor invoices, accrued expenses payable etc.
Long-term liabilities: Obligations which are not due within one accounting cycle – typically one year from the balance sheet date. Examples are Mortgage, bonds, loans and notes payable.
Equity: Ownership interest in a business which includes capital contributions for purchasing shares in a business or ownership plus undistributed (retained) earnings.
An income statement shows business owners, managers and investors profitability of a business and relationship between revenue, expense and profit.
Revenue: Money earned in exchange of goods or services sold and delivered. Accrual basis accounting require recording of revenues at the time of delivering the goods and services and, if cash is not received at the time of delivery, collection of revenue is reasonably assured. Under cash basis accounting revenues are recorded only when cash is received.
Expense: Economic value sacrificed or cost incurred on production, sales and marketing and on general and administration. Examples of expenses include cost of goods sold, wages and benefits, rent, utilities, sales and marketing, interest expense, depreciations and amortizations. Under the accrual basis of accounting, expenses are recorded when incurred regardless of timing of payment. Cash basis accounting requires recording of expense when actual payments are made regardless of when expenses are incurred.
Other Income and Expense: Also, known as non-operating income or expense which includes items such as dividend income, profits or losses on investments, and gains or losses of foreign exchange.
Statement of Cash Flow
A statement of cash flow maps the sources and uses of cash. It is not the same as an income statement. Net income shown on an income statement includes many non-cash items such as depreciation, amortization, deferred income tax, and write off of assets and liabilities. The statement of cash flow strips out non-cash items and shows cash generated from operating, investment and financing activities. One of the most important performance metrics of a business is cash flow from operations. Generating sufficient cash from operations is key to long-term business success.
Cash from operations: It is an important financial performance metric which indicates whether a company is able to generate sufficient cash flow to maintain and grow its operations. In the long run, a business must generate positive cash flow from operations to be solvent and provide for the normal outflows from investing and finance activities. Cash from operation is derived by adding all non-cash items (such as depreciation and amortization) and the net increase or decrease in the amount of cash used for working net capital.
Cash from investment activities: Shows the amount of net cash reinvested in operating assets and other investments. Business owners, managers, investors and lenders uses this information to estimate how much money a company must reinvest in operating and other assets to maintain and grow revenue and income. Cash flow from investing activities would include outflow of cash for long term assets such as land, buildings, equipment, etc., and inflows from the sale of assets, businesses, securities etc.
Cash from financing activities: Cash flow from finance activities shows net cash flow to or from equity investors and lenders. It helps investors and business owners understand the amount of cash a business raised by issuing shares and how much debt was incurred to finance its operations, investments, future cash needs, and to reduce debts or pay investors.
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