Financial statements definition
In accounting process of the firm's building you need to prepare financial statements. Financial statements provide you an picture cleared image of how is your business or any other buisness performing year after year.
Financial statements allow buisness decision makers to evaluate what is buisness current financial situation in market.
Buisness decision makers can find out what are the strong cash generating source in company and also able to identify those source which are not generating cash flow. Cash flow statement help in management of any size of buisness.
What Are Financial Statements?
Formal records of financial activities which are prepared from accounting report by buisness decision makers known as financial statements.
Accountants prepared financial records of buisness through accounting process for fixed accounting period known as financial statements.
When any enquiry set up on any company then company asked to show his financial statements in front of enquiry agency doing at that time.
Financial statements prepared by any business decision makers is correct or not correct are audited by government authority, accountants, chartered accountants and firms etc.
Time to time audit financial statements of any company necessary to ensure accuracy and it help buisness decision makers at time of tax filing, investing and financing purpose.
What are the basic components of financial statements definition
There are basic four components of financial statements are given below-
1. Income statement
2. Cash flow statement
3. Balance sheet
4. Statement of retained earnings
Income statement in financial statements definition
Income statement means total profit which are generated by company after subtracting expenses on various things and total revenue generated by company. Income statement tell us about company total profit or total income.
This component of financial statements deals with company expenses and total revenue generated by company during accounting period.
Cash flow statement in financial statements definition
Cash flow statement of any company provides brief description to buisness decision makers how well company financial situation in present accounting period.
Cash flow statement deal with company cash flow generated from operation activities, financing activities, debt obligations and fund investing activities.
You can define cash flow statement as the statements written on paper which give brief description to you(buisness decision makers) of how well company is generating cash flow during accounting period.
Understanding Balance sheet in financial statements definition
Balance sheet is a component of financial statements. In this type of financial statements accountants prepare statements of company which are dealing with assets, liabilities and stockholders equity.
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| Balance Sheet- Component of financial statements |
Balance sheet from the name clear it is financial statements written on sheet which deals with assets, liabilities and equity stakeholders of a company.
Company required to make his balance sheet of his business because balance sheet provide brief description of performance of assets, liabilities and equity stakeholders during fixed accounting period.
Do you know? What is balance sheet formula. Balance sheets included 3 types of entities of buisness. Three entries of balance sheet are given below:-
- Assets
- Liabilities
- Equity of stakeholders
Formula of balance sheet financial statements definition
Balance sheet included formula because balance sheet have 3 entity (assets, liabilities, and equity stakeholders). So each entity of balance sheet have formula.
Assets = (liabilities+equity of stakeholder)
In balance sheet assets always located on left side. Assets included current assets like cash equivalents, net inventories, property and other intangible assets.
Data from the balance sheet financial statements definition
Balance sheet is one of the important type of financial statements. Balance sheet is prepared including larger sets of data.
When you watch any business balance sheet sample then you will notice lots of data printed on same sheet and same place.
You should have knowledge about what type of data in balance sheet available of any company. Balance sheet format can be prepared in Ms-excel.
Balance sheet format always in table form which can be prepared with help of excel and on sheet by hand.
Balance sheet included assets which tells you how assets of company are going to be funded with help liabilities. It can be in form of debt or stakeholders equity.
Item included in balance sheet
In balance sheet financial brief description written under three entries.
Assets
Assets are located in balance sheet on top left side. Assets included all those financial details which are generated by assets of company during accounting period.
Assets in balance sheet sub characterized in three levels, i.e. cash and cash equivalents, account receivable and inventory.
Liabilities
Liabilities included three sub category i.e. debt including long term debt, wages payable and dividend payable.
Share holder equity
Share holder equity located on left bottom. This section last section of balance sheet and come just below of liabilities section in balance sheet.
Share holder equity means it is a difference between total company assets minus total liabilities.
Share holder equity further defined as total amount paid to share holder back return when all assets of company liquidated in period of accounting.
Share equity = Total Assets - Total liabilities
Formula of income statement in financial statements definition
In income statement you can collect financial statements of long range duration which is missing in balance sheet. Income statement give brief description of how income of company generated during accounting period.
Income statement = (Revenue - Expenses)
Data from income statement in financial statements definition
If you want to know about how any company is generating income in fixed accounting period then you need to know about income statement.
Income statement one of the important type of financial statements. In this type financial statements main focus is on company revenue generated and expenses done during fixed accounting period.
Accountants speak income statement as other name as profit and loss statement. By the help of income statement you make final decision about company is working in profit or loss in fixed period or financial year.
Company net income can be find out when you substracted expenses from revenue.
How hard to become financial analyst?
Anybody can financial analyst very easily after knowing complete knowledge of Economic. Financial analyst only have to add total input cost of buisness to run a business in fixed financial year and total selling cost. At last financial analyst subtract total selling cost and total input cost.
Normal people always do financial analysis in daily life. Total income generation per month - total sum of all expenses per month.
Income statement types of revenue
Income statement format included two types of revenue.
- Operating revenue types of income statement
- Non operating revenue types of income statement
These types of operating revenue included in income statement format which included revenue generated from operative activities of company.
Operating revenue types of revenues are generated from company core activities.
Non operating revenue
These types of revenues included in income statement format which included revenue generated from non operating activities of company.
Non operating revenue types of revenues are generated from non core activities of company.
How to use financial statements
Do you know? How investors and and government authority uses financial statements as a tool to check company financial situation in fixed accounting period.
You can can also easily use financial statements to check any company performance in fixed accounting period before making investment.
Financial statements of any company provides us closer image how will company going in future. Any company have maintain good financial statements then that give some level of surety to investors give high return in future. Although in business have risk of failure we all knew that.
Accountants most of cases created financial report and then passed to buisness decision makers. Buisness decision makers take decision of buisness accounting to financial report.
Accountants create 3 types of components of financial statements i.e income statement, balance sheet and cash flow statement.
Limitations of financial statements
There are many advantages of financial statements for business decision makers and investors. But financial statements have some limitations also which needs to make it in notice.
Offcourse financial statements provide present financial situation of company in fixed accounting period but sometimes investors and decision makers makes conclusion more than limits of what financial statements showing for a company.
This results may result in false interpretation of buisness or company performance in fixed time period.