The balance sheet, income statement, and the cash flow statement are three prevalent types of financial statements. Financial statements offer a window into a company’s health, which can be challenging to gauge using other means. While the accountants and finance specialists are trained to read and comprehend these documents, many business professionals are not.
There are three main types of financial statements- the balance sheet, the income statement, and the cash flow statement. When you know how to read and understand the financial statements, you can find the ways to make more profit, expand your business operations, or catch problems before they grow.
A bookkeeper can prepare financial statements, providing the information you need to understand the cost of doing business. Your financial statements also tell you how effectively you generate revenue. Thus, Atlanta bookkeeping is essential in maintaining your financial information. Hence, it is always up to date and ready to review. As a result, you can manage your business more effectively.
What’s a financial statement?
Financial statements are reports that explain an organization’s financial performance and profitability for a certain period. It serves as an objective evaluation of a company’s financial health during financial reporting. There are three main type of financial statements:
Balance sheet: This statement lists a company’s assets, liabilities, and equity balances and showcases its financial position at a particular time.
Income statement: An income statement reflects a company’s revenue and expenses for a given period. It provides information on investment returns, risks, financial flexibility, and operational capabilities.
Cash flow statement: It documents a company’s cash inflows and outflows. It can be separated into three categories: operating, investing, and financing.
Business owners use three financial statements to understand their bottom lines and make very smarter business decisions. Financial statements also help stakeholders—such as shareholders, creditors, and regulators—understand a company’s financial performance and health. They are essential when seeking the funding for your business or fulfilling regulatory requirements.
Comprehending a balance sheet
Your balance sheet tells how much value you have (assets) and money you owe (liabilities). Assets can comprise cash, accounts receivable, equipment, inventory, or investments. Liabilities include accounts payable, accrued expenses, and long-term debt such as mortgages and other loans.
Parts of a balance sheet
Assets consist all the value you have on hand.
Liabilities cost you money.
Owner’s Equity is the money that you as an owner has sunk into the business.
Comprehending an income statement
Your income statement reflects you how much money your business has spent and how much it has earned over a particular financial reporting period. That lets you to calculate your net profit— the bottom line.
It’s called the bottom line because net profit is at the bottom of the income statement. As you work down your income statement, more expenses are applied to your revenue, meaning your income line item becomes more specific.
Parts of an income statement
Sales revenue is all the money that has entered the business during the month before any expenses are considered.
Cost of Goods Sold (COGS) is the money spent to earn the sales revenue.
Gross profit is income after subtracting COGS without taking general expenses into account.
General expenses include money necessary to spend monthly to run the business.
Operating earnings or EBITDA— Expenses Before Interest, Taxes, Depreciation, and Amortization
Income tax expense is the cost of the estimated income tax paid or owed for the specific reporting period.
Net profit is the total amount the business has earned after accounting for all expenses, including tax and interest.
Comprehending a cash flow statement
Not every business uses the cash flow statements. However, if you use the accrual method of accounting, this statement of cash flows is essential for assessing your financial health.
With the accrual method, the expenses and income are recorded during bookkeeping whenever they’re incurred, not when the money changes hands.
A cash flow statement reverses those type of transactions where you don’t have cash on hand, so you get a real idea of how much cash you have to work with during a period.
Parts of a cash flow statement
Cash is the cash at the beginning of the month.
Net income is the total income for the month.
Additions to cash are reverse expenses listed on the books but haven’t been paid out yet.
The power of incorporating financial statements
Incorporating financial statements into your business workflow and processes can help you better manage your business, highlight improvement areas, and identify growth opportunities. Reviewing your financial statements regularly is crucial for gaining valuable insights into your business’s economic health and ensuring its long-term success.
Need help with financial planning, bookkeeping, or tax preparation? Get in touch with our team at Better Profits Bookkeeping now!