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Financial statements are crucial documents that provide essential information about a company’s financial health and performance. Whether you're studying finance, business, or just interested in understanding how companies operate, learning about these statements is fundamental. This article will delve into the three primary financial statements: the Balance Sheet, the Income Statement, and the Statement of Cash Flows. We'll also explore examples from two companies, Walmart, a global retail giant, and Interwood, a leading furniture manufacturer in Pakistan, to illustrate these concepts.
As we know What is Finance?
Finance involves identifying the resources a company needs, figuring out how to obtain the money to acquire those resources, and efficiently managing them once acquired. To make informed decisions about these resources, companies rely on various types of information, one of the most important being their financial statements.
The Three Primary Financial Statements
- The Balance Sheet
- The Income Statement
- The Statement of Cash Flows
- The balance sheet is like a snapshot of a company’s financial condition at a specific point in time. It lists the company's assets, liabilities, and equity.
- Assets: These are valuable resources owned or controlled by the company that are expected to generate future benefits. Assets can be tangible (like buildings and machinery) or intangible (like patents or trademarks). For instance, as of January 31, 2023, Walmart had total assets worth $243 billion. This included $57 billion in inventory sitting on the shelves of its numerous stores and significant investments in land, buildings, and equipment.
- Liabilities: These represent the company's obligations or debts. They are amounts the company owes to others, which must be repaid in the future. For example, if a company borrows money to buy new machinery, this debt is a liability.
- Equity: This is the residual interest in the assets of the company after deducting liabilities. It represents the owners' claims on the business. Equity comes from two sources: direct investments by the owners and retained earnings, which are profits kept in the business for growth rather than being paid out as dividends.
The balance sheet equation can be summarized as:
Asset = Liabilities + Equity
The income statement shows the company's financial performance over a specific period, such as a month, quarter, or year. It reports the company’s revenues and expenses.
- Revenues: These are the amounts earned from the company's primary business activities, like selling products or providing services. In 2022, Walmart generated $611 billion in revenues from its retail operations.
- Expenses: These are the costs incurred to generate the revenues. They include everything from purchasing raw materials to paying employees. In 2022, Walmart spent $464 billion on expenses, which included paying suppliers for the products sold in its stores.
- Net Income: This is the difference between revenues and expenses. If revenues exceed expenses, the company makes a profit, known as net income. Conversely, if expenses exceed revenues, the company incurs a loss.
3. The Statement of Cash Flow
The statement of cash flows details the company’s cash transactions over a specific period. It categorizes cash flows into three activities:
- Operating Activities: These include everyday business activities, such as cash received from customers and cash paid to suppliers and employees. In 2022, Walmart's operations generated $29 billion in net cash.
- Investing Activities: These involve purchasing and selling long-term assets like property, plant, and equipment. In 2022, Walmart spent $17 billion on new assets, including land and buildings.
- Financing Activities: These include obtaining funds through borrowing or issuing shares and repaying loans or distributing dividends to shareholders. In 2022, Walmart paid $6 billion in dividends to its shareholders and also bought back some of its own stock.
