Whether they are managing a small business or a big corporation, entrepreneurs will always have to deal with financial statements in their line of work. According to BusinessDictionary.com, a financial statement is “used to show a company’s performance over a certain period of time, generally every fiscal quarter.” It shows quarterly gains and losses, and reflects a company’s financial standing.
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Because of their importance, financial statements have become a part of any business venture, thus requiring entrepreneurs to be proficient in reading and interpreting these documents. Reading a financial statement may be daunting at first, but anatomizing it to its three essential components may help neophytes in conquering this challenge.
Components of a financial statement
1. Balance sheet. This contains the assets, liabilities, and net worth or shareholder equity of a corporation. Put in simpler terms, it represents what the company owns (e.g., bank accounts and real estate) and how much the company owes to others (e.g., loans and accounts payable).
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2. Cash flow statement. This is a report of cash inflow and outflow, and provides a clear picture of where all the company’s money goes. It is further subdivided into three parts: financing activities, operating activities and investment activities.
3. Income statement. This shows how much revenue the company was able to take in for a specified time period, alongside the amount used to come up with that revenue.
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Isidor Hefter has been affiliated with Rosen Seymour Shapss Martin & Company, LLP for more than 20 years and is currently a senior partner at the firm. More updates on the accounting industry may be found on this Facebook page.
