Financial Statement of any company helps to determine the market position or the financial health of any company in current scenario. To understand the financial position one must understand some of the key terms related to it.
Mainly, the financial statement of any company includes:
- Balance Sheet
- Income statement or Profit and Loss Account
- Cash Flow Statement
BALANCE SHEET:
It is the overall summary of the financial statement of the any company. It compares the asset and liability of the company to decide whether the company is in good position or not.
The equation for balance sheet is mentioned below:
Assets = Liabilities + Shareholder’s Equity (net worth)
Or Assets-Liabilities = Shareholder’s Equity (net worth)
Why Balance Sheet is important to investors?
For an investor, it is utmost important to understand the investments done by the company in terms of asset and the liabilities that it has to pay in near future.
The assets balance mainly include cash and cash equivalents i.e., larger the assets the better it is to invest in that firm to reap more benefits and dividend.
In case of liabilities, it should be lower as it helps the investors to find out the debts that the company owes. Shareholder’s Equity includes the owner’s fund and the amount that the company has raised from various sources. Ideally, it should be higher so that investors can maximize their benefits.
PROFIT AND LOSS ACCOUNT:
It is also called as Income statement which basically summarizes the revenues, manufacturing cost, sales and general expenses, depreciation charges, tax costs incurred during specified financial period.
Why Profit and loss Account is important to investors?
It reveals the current profitability and the share prices of the business in a particular financial year. Investors can easily compare Income statement of past financial years to arrive at investing decision.
For a better and long term investment plan a company must be consistent in making profits, then only an investor finds it a good investment choice.
CASH FLOW STATEMENT:
Cash Flow Statement shows the inflows and outflows of cash from the company. Basically, it acts as a bridge between Income statement and balance sheet by analyzing the amount of money moved in and out of the business. Also, it is the ultimate barometer and defines the success or failure of a business. There are three sections of statement of cash flows:
Operating Activities-Basically it includes the primary business of the company, the activity of buying and selling of goods and services (manufacturing, distributing, sales and marketing).
Investing Activities-It includes the purchase and sale of long term investments and records changes in equipments such as plant, machinery land and other assets.
Financing Activities-It shows the aggregate changes in the cash position resulting from capital gains or losses and how borrowings of funds affects the cash flow of company.
Why Cash Flow Statement is important to investors?
Before investing in any company, the investor wants to know how well you manage your cash flow. It reflects the liquidity position of a company’s fund.
In other words, it provides security that after investment they will see a healthy return on investment (ROI) from the funds they invest.
By analyzing this cash flow carefully, potential investors can determine if the company is in a positive or negative cash flow position.
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