Financial statements provide a snapshot of your company’s assets, liabilities and shareholder equity at any particular moment in time. Financial statements help identify current profitability while providing information for investors or lenders as well as planning for future success.
One of the most critical financial statements is an income statement (often known as P&L). This report showcases your income and expenses during a specific time.
Income Statement
The income statement is one of three standard financial statements designed to assist owners, investors and lenders in assessing a company’s profitability and efficiency. It measures profit by subtracting business expenses from revenues; its contents may include both internal and external elements like sales revenues, cost of goods sold revenues, interest expense expenses or taxes.
Businesses use accounting software to record and classify incoming and outgoing funds, making the income statement generation process faster.
The first step involves listing out each source of revenue: this may include product lines with their sales revenue or even reduced amounts due to discounts, returns or allowances which then provide an intermediate total known as net sales revenue.
Next, an income statement provides a company’s various operating expenses. These are usually classified into natural categories like cost of goods sold (COGS) and selling, general and administrative expenses (SG&A).
Losses and gains are also detailed on this income statement; gains could result from asset sales or peripheral transactions while losses result from unexpected events that reduce net asset values.
Subtracting expenses and losses from cumulative revenue streams yields net income, reported as earnings per share (EPS).
Chart of Accounts
- Assets
- liabilities
- Equity
- Income
- Expenses
Balance Sheet
The balance sheet provides a snapshot of your business’s financial health. It details all its assets, liabilities and total value of stockholders’ equity at any point in time. Like its income statement counterpart, its balance must always remain balanced so that assets equal liabilities and equity.
The asset side of your balance sheet outlines all of your company’s own assets, such as cash, inventory and property. They’re generally divided up according to their level of activity – for instance, current assets would appear under Current assets; long-term ones are classified differently and other noncurrent ones.
Liabilities on the other hand list everything your company owes other parties such as accounts payable, sales taxes collected and payroll debt; any outstanding long-term obligations such as mortgage or bond payments also get recorded here.
The balance sheet can also help you assess how your business compares with competitors, determine if short-term expenses such as bills and payroll can be covered and calculate important financial ratios such as return on equity.
Though creating a balance sheet may appear complex, preparation of it is generally straightforward; though you might prefer hiring an accounting services for small business in USA for this task yourself or using Excel software programs like Open Office to produce one yourself.
Cash Flow Statement
A cash flow statement provides businesses with an accurate picture of their incoming and outgoing cash. It outlines exactly the amounts coming into and going out from operating activities, investing activities, and financing activities during a particular period.
The cash flow statement provides a snapshot of a company’s daily business operations, including customer receipts, invoice payments, supplier purchases and employee salaries.
The second section details any cash inflows or outflows related to investing activities like inventory purchases/sales/acquisitions/dispositions; non-cash expenses like depreciation/amortization are also considered an investment activity in terms of cash outflows/inflows as they help spread costs over their useful lives.
Finally, the third section reveals a company’s cash flow from financing activities. This section includes both inflows of cash from stock or debt financing and outflows such as dividend payments, share buybacks and interest payments on debt – an essential measure to determine its liquidity and reliance on external funding sources.
Cash flow statements provide important insights into a company’s liquidity and financial health, so they should be utilized alongside income statements and balance sheets. If you need help in preparing or interpreting your company finances, consult a financial advisor.
Statement of Retained Earnings
Retained earnings represent the historical net profit generated by your business that hasn’t been distributed as cash dividends to shareholders. This figure can be found in the equity section of your balance sheet and will decrease if cash or stock dividends are distributed while increasing if positive net income for the period occurs.
Prepare a Statement of Retained Earnings, also referred to as an Owner’s Equity Statement or Detailed Earnings Statement, either separately or by appending it to your balance sheet at the end of every financial reporting period. It works like this: At the start of each period you report retained earnings balance at its beginning; during each reporting period, all balance adjustments occur based on net income changes, cash or stock dividends received and any other relevant items. Finally, the ending balance for that period is recorded here as the new retained earnings balance reported as its ending balance at its conclusion.
Although your statement of retained earnings doesn’t provide as much detail, it remains an integral component of your overall reporting package and can help build trust with investors and creditors as you grow your business.
Investors rely on retained earnings numbers that show growth to know they can expect future dividend payments, while creditors assess your business using various financial metrics when assessing whether to lend money or not. Low or negative retained earnings numbers could cause creditors to deny loans altogether or charge higher interest rates to compensate for the potential risk involved.