An overview of 3 Basic financial statements

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Financial statements are written records of a business’s financial situation. They stand as one of the most essential components of business information, which provides much important insights to consultants.

When it comes to Finance, there are 3 Basic statements:

Financial statement is very important to understand how your business is running

Balance Sheet

Balance Sheet is like a snapshot of the current stage of the company’s property, debt, and ownership AT one given point in time. The balance sheet shows three figures …:

  •         Assets: what the company owns: Building, Equipment, Cash, Inventory, along with some other intangible items as well.
  •         Liabilities: what the company owes: Loans, bills to be paid, etc. Debt is like negative assets.
  •         Take Asset subtract Debt, we have the “net worth” or “book value” of the company. It’s called Equity.

The neat thing about the Balance sheet is that it’s always balanced. Every action, every transaction change the three components but it’s always in harmony. Here are a few examples:

  •         Take cash to pay debt? Both Assets and Liabilities reduced.
  •         Owners invest more money in the company? Assets and Equity both increased.
  •         Sold a service for some cash? Assets increases and so is the equity.

Sometimes they are categorized in one or other way, but most of the times you can easily grasp them.

Income Statement  

Income Statement is sometimes called the Profit & Loss, or P&L. While the balance sheet is a snapshot at a given time, the Income Statement records the business performance through a period of time: a quarter, a year. The Income Statement directly tells you how the company is doing in terms of making money, the heart of any business.

From the top to bottom, the Income Statement shows the Revenues, Costs, and Profits. That’s why often times, Profits is referred to as the “bottom line”.

While Revenue is straight forward, Cost has a number of tricky components. Here are a few most frequently-mentioned types of Costs:

  •         The Cost of Goods Sold: … refers to the direct cost of the product or service sold. For example, if I sold you a $5 T-shirt which I bought at the price of $3 earlier from Walmart, then my revenue is $5, my Cost of Goods Sold is $3.
  •         Marketing Expenses
  •         Salaries
  •         Administration Expense
  •         Depreciation & Amortization: …. these are interesting types of cost because they are non-cash. It involves a big cost the company paysupfront for a big thing. But that big thing adds values over a long period of time and therefore being allocated throughout a longer period. An example of depreciation would be the cost of a building allocated throughout decades. Amortization is just the different version of depreciation used for intangible assets, such as patents, licenses, etc.
  •         Interest Expense
  •         and lastly, Tax

Depending on specific needs and conditions, companies break down the Statement into various further steps down the stream, along with a percentage of the total revenue, called “margin”. For example, we have:

  •         Gross Profit“, which is just Revenue subtracts Cost of Goods Sold;along with this, we have “Gross margin percentage”
  •         EBITDA, which stands for Earnings Before Interest, Tax, Depreciation & Amortization; along with this we have “EBITDA margin percentage”
  •         EBIT, which stands for Earnings Before Interest and Tax; along with which we have “EBIT margin percentage”

One important thing to notice is that the Income Statement does NOT necessarily relate to the cash and any money factor. Many of the times, especially for “Business to business” transactions, the selling happens before the money flow. So we may have to record a revenue without having the cash yet.

Cash Flow Statement.

There’s a famous saying that: Income statement is an opinion, Cash Flow statement is the fact.

The Cashflow statement just strictly monitors the cash flow in or out, categorized in different sections. Three of them are: Operation, Financial and Investing.

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