Financial statements provide the display of the financial health of a corporation at a particular point which gives insights into the company's performance, operations, cash flows, and overall conditions. Shareholders need them to make important decisions about their investments.
The information provided in financial statements is the foundation of corporate accounting. The information is reviewed by management, investors, and lenders for the purpose of assessing the company's financial position.
Data available in the balance sheet, the income statement, and cash flow is crucial to calculate in important financial ratios. Together these three statements give a comprehensive portrayal of the company’s operating activities.
There are a variety of tools to analyze the evaluations in these statements such as debt ratios, efficiency ratios, and price ratios, profitability ratios, liquidity ratios
The Balance Sheet:
A Balance sheet is a financial statement which reports the company's assets, liabilities, and shareholders' equity.
( Assets = Liabilities + Shareholders’ Equity )
Assets: Things the company owns,
Liabilities: Borrowed Money,
Shareholders' equity: taking it from investors
Generally, investors analyze the comprehensive view of the balance sheet. For example, analysts look at the total capital of the firm which predicts the liabilities and equity together. On the asset side of the balance sheet, analysts will typically be looking at long term assets and how efficiently a company manages its receivables in the short-term.
Importance of the Balance Sheet
The balance sheet displays the financial position of the company and provides the curative details of investments and also the debt and equity levels. These capital details help the investors and creditors to understand the position and the companies performance.
The Income Statement:
An income statement is one of the three crucial factors for reporting a company's financial performance. The income statement is also known as the profit and loss statements, typically presenting annually or quarterly.
The income statements allow the businesses to compare the trends in income & expenses over time.
Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)
An income statement provides valuable insights such as the company’s operations, the efficiency of its management, underperforming sectors, and its performance relative to industry peers.
Importance of Income Statement:
The balance sheet is just an overview of the companies’ assets, liabilities, equity, and debt but; does not show what actually happened in the period that caused the company to the current position. Therefore, profit figures on the income statement are crucial to the investors.
The income statement format contains sales, expenses, losses, and profit. Statements can be used to help the investors evaluate the companies past performance and determine the future cash flows
The Cash flow statement:
The Cash Flow Statement provides a view of a company's overall cash liquidity flow by showing the cash transaction activities. It includes all the cash inside and outside flows.
Cashflows statements are divided into three parts: operating, investing, and financing.
Importance of Cash Flow Statement:
The cash flow statement gives an overview of the cash liquidity flowed both: inside & outside. This gives the investors an idea if the company is stable or not, has enough funds to pay for its expenses and purchases.
Importance of Accurate Financial Statements for Organizations:
Even the smallest figures on the balance sheet can have a huge impact on the companies. Assets never perceive the same value before they purchased. A percentage has to be deducted from their value for depreciation.
Evaluate Tax Liability
Corporate tax rates are quite high than in other fields. When companies make a lot of profit, the taxes are equally high. The owners often get shocked by how little they get once they pay off the paid taxes to the government. Can they reduce their tax burden? If yes, they will need the most accurate numbers in the report.
Why financial report is very essential because it also mitigates the costly mistakes or internal wrongdoing in business. If anyone wants to catch the illegal activities taking place in the companies, financial reports are the best channel to catch it.
Companies spent a lot of time analyzing their accounts and checking every entry to find if anyone has tampered with any part of the business or an accounting error has been made.