Balance Sheet Overview

A balance sheet

A balance sheet lists the liabilities, assets, and equity of a company’s owners at a particular point in time. It is important for accountants and business owners to understand how to interpret and read the information contained in the balance sheet. Without these details, accountants and management may make decisions that adversely affect the financial health of the company. For management purposes, they can know if the company qualifies for additional credits or loans (Johnston, Wilson, Keers, Medlen & Walters, 2017, p. 45). On the other hand, investors use balance sheet information to weight whether the business will generate those returns in future.

Income Statement

The income statement summarizes the total expenses and incomes that the organization has made in a particular financial year. The income statement allows the management to compare the organization to others in the industry. The income statement facilitates the comparison of costs and revenues from the previous years to note some of the most critical business trend profitability, therefore, governing the decision making process. The income statement might also be studied by the creditors to see whether the business is in a position to pay them promptly.

Statement of Cash Flow

The cash flow statement is an important document because it identifies the exact areas where the business spends money. The cash flow is the movement of funds in the financing, investing, and operating activities. It is usually measured during a specific accounting period or finite accounting period. The cash flow information can give valuable information about the organization solvency or liquidity. In addition to this, the management uses cash flow to determine the value of the project or return, to identify any problems pertaining the firm’s liquidity and to indicate the timelessness of cash in a project, which is later on used as input variables in other models such net present value. The cash flow determines the actual organization’s level of profitability when the management believes that the accrual accounting concept doesn’t represent reality (Weetman, 2016, p. 63). The statement provides the relevant information about the organization’s debt repayment and borrowing activities, the company’s repurchase, and sale of the ownership securities and other factors affecting company solvency and liquidity. The cash flow statement doesn’t predict the firm’s future cash flow.

The Statement of Shareholders’ Equity

The statement of owner’s equity provides information about the changes in equity in a given accounting period; this statement provides extra information to the management about the equity related activities in that period. The information presented in this statement include the unrealized losses or gains, retained earnings, additional paid-up capital, treasury stock, common stock, and preferred stock.

References

Johnston, R., Wilson, C., Keers, B., Medlen, A., & Walters, B. (2017). Financial management.

Weetman, P. (2016). Financial and management accounting. Harlow: Pearson.