Financial statements are a fundamental component of business accounting. Using these statements, professional accountants can keep track of all necessary financial metrics. Whether you’re a professional account or business owner who’s thinking of hiring one, you should familiarize yourself with the following components.
#1) Cash Flow Statements
A cash flow statement features the inputs and outputs of cash within a specified time frame. While there are different ways to create a cash flow statement, most consist of cash inflow minus cash outflow plus opening balance, which equals the business’s closing balance for the specified time frame.
It’s important to note that a cash flow statement only deals with cash transaction. If a transaction was made using a credit card or debit card, it’s not considered when creating a cash flow statement. The same goes for debt a business owes, or debt owed to the business.
#2) Income Statements
A second component is an income statement. Also known as “statement or profit” or “loss and income,” it’s used to calculate a business’s profit or loss. The algorithm for calculating an income statement is sales revenue minus cost of goods sold minus total expenses plus total income minus tax paid, which equals either profit or loss.
When creating an income statement using the algorithm described above, you’ll get either a negative or positive balance. If the balance is negative, your business experienced a financial loss. If the balance is positive, your business experienced a profit.
#3) Financial Position Statements
The third and final component is a financial position statement. This statement reveals a business’s assets, liabilities and equity. It features several columns, displaying assets on the right and liabilities and equity on the left. Also known as a balance sheet, a financial position statement differs from its asset
When calculating your financial position statements, you’ll need to determine the difference between your current assets and current liabilities (debt). Calculating this should reveal your working capital. With that said, assets are divided into three categories: fixed (long term), current assets, and intangible assets.
Hopefully, this gives you a better understanding of the different components used in financial statements. The key thing to remember is that financial statements consist of cash flow statements, income statements, and financial position statements, each of which has its own unique characteristics.