How to read Financial Statements?

Financial statements (or financial reports) are formal and written records of the financial activities and position of a business, person, or other entity. These are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes.

Mastering financial statements is the first step to reaching your goals — whether you want to enter new markets, develop a new product, or sell up and move on. You’ll have the numbers to back your decisions.

The three most important, and most common, financial statements for any business are:

• Balance sheet: Shows what a business’s financial position is at a moment in time.
• Profit and loss, or income statement: Shows financial performance in a particular period of time.
• Cash flow statement: Records money coming and going for a particular period of time — like your bank statement, but with insights into patterns and/or problems.

Balance Sheet

A balance sheet reveals the assets and liabilities of a company and what it has and owes. Some things under assets are cash, equipment and investment, while liabilities can include accounts payable, mortgages and loans. The balance sheet presents details that determine the return on investment and spread of debt and equity. The formulas for carrying out this accounting equation are:

Assets = liabilities + owners' equity.

Liabilities = assets + owners' equity

Owners' equity = assets - liabilities

Assets refer to anything that a company possesses that has measurable value. They're usually tangible and physical, such as real estate, goods and furniture. They may also be intangible, such as computer software, licences and copyrights. Liabilities refer to everything a company owes. They're usually loans, expenses, mortgages, bank overdrafts, income taxes and payable interest. Owner's equity refers to a valuable percentage of a company's assets that go back to owners and shareholders after the company pays the liabilities.

Income Statement?

An income statement is a financial statement that details a company’s revenue, expenses, and losses over a specific time period in order to show the company’s net profit (or net loss). Also called a profit and loss statement (P&L), a net income statement, or a statement of earnings, your income statement shows the profitability of your business—whether you’re using it internally, or showing it to banks and investors to encourage them to invest.

An income statement is one of the three most important financial statements in business accounting, along with a balance sheet and a cash flow statement (also called a statement of cash flow).

Cash Flow Statement

The purpose of a?cash flow statement?is to provide a detailed picture of what happened to a business’s cash during a specified period, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business.

The cash flow statement is typically broken into three sections:

• Operating activities
• Investing activities
• Financing activities

Operating activities?detail cash flow that’s generated once the company delivers its regular goods or services, and includes both revenue and expenses.?Investing activities?include cash flow from purchasing or selling assets—think physical property, such as real estate or vehicles, and non-physical property, like patents—using free cash, not debt.?Financing activities?detail?cash flow from both debt and equity financing.

Ideally, a company’s cash from operating income should routinely exceed its net income, because a positive cash flow speaks to a company’s ability to remain solvent and grow its operations.

It’s important to note that?cash flow is different from profit, which is why a cash flow statement is often interpreted together with other financial documents, such as a?balance sheet?and income statement.

These statements are especially important when you ask someone to invest in your business. You’ll have to show how your business makes its money — financial statements are how you show them.

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