“I just got promoted to a management position and I am unfamiliar with financial statements. Can you give me a quick overview of what they are?”
Financial statements are three tools to provide information to companies or individuals about their financial situation. There are three statements that are usually referred to as “financial statements”, they are the Income Statement (also referred to Profit and Loss Statement or P&L), the Balance Sheet and the Statement of Cash Flows.
Income Statement: Much like your check book register, this statement reflects for a period of time (e.g. month, quarter, or year) the incomes from all sources, all the expenses that have been or need to be paid, and the Profits or Losses. Simply think that of this in this way; Income – Expenses = Profit (if positive) or Loss (if negative).
Balance Sheet: The Balance Sheet shows the financial situation of the company or person at a moment in time. It is divided into three areas, Assets, Liabilities and Equity; Assets are the things that are owned (e.g. cash, investments, plant, equipment, receivables, prepaid expenses, etc.); Liabilities are things that are owed (payables of all types-wages, loans, interest, expenses, etc.); Equity (sometimes called Net Worth or Owners Equity) is the difference between Assets and Liabilities and can be divided into two categories, an amount paid for Stock (if stock has been issued) and Retained Earnings. The “Balance” in the title of the Balance sheet is when Assets = Liabilities + Equity.
Statement of Cash Flows: This statement is used to analyze changes in cash at a moment in time. It shows the changes in cash flows from three areas, Operations, Investing and Financing. The Statement reflects the changes in Profit or Loss from the Income Statement and the changes from Investing and Financing that come from the Balance Sheet. The cash flows for the period under review can be either increasing or decreasing from these three areas. The sum of these three areas (Net Cash Flow) would have a bearing on making a financial decision at that moment in time depending on whether the Net Cash Flow is adequate to move forward with a decision.
Congratulations on the promotion and I hope this brief explanation helps in a small way.
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