Learn about financial statements, their types- Income Statement, Balance Sheet, and the Cash Flow Statement

1) Income Statement (Profit and Loss Statement): An income statement (or profit and loss statement) is a type of financial document that indicates the revenues, expenditures, and profit of a business over a stated period, most often a quarter or year. It is useful in analyzing a business's finances by disclosing the amount of money it earned (revenues) and spent (expenses), culminating in a profit or a loss.

Important elements of an income statement consist in:

☑️ Sales Revenue: that is, the whole amount made from selling goods or services.
☑️ Cost of Goods Sold (COGS): The direct expenses of creating goods or services sold.
☑️ Gross Profit:-COGS less Revenue.
☑️ Operating Expenses:-Running the company comes with running expenses including utilities, rent, and salaries.
☑️ Operating Income:-Gross profit less running expenses forms operating income.
☑️ Income and Expenses:-Income or expenses unrelated to the main operations of the core company—such as interest or investment income—are known as other income or expenses.
☑️ Net Income:- After all income and expenses have been deducted, net income—that final profit or loss—is what remains.

2) Balance Sheet: balance sheet is one of the three basic financial statements used to evaluate the financial situation of a company. Usually at the end of a reporting period—quarterly, annually—it offers a moment in time view of the financial situation of a company.

Major Elements of a balance sheet::

☑️ Assets: Everything the business owns.
1. Current Assets: Assets expected to be used or converted into cash within one year—that is, cash, accounts receivable, inventory, etc.
2. Long-term Assets: including property, machinery, intangible assets like patents—that is, non-current assets—that are not readily convertible into cash.

☑️ Liabilities: The company's obligations.
1. Current Liabilities: Debts or obligations due within one year—that is, accounts payable, temporary loans.
2. Non-Current Liabilities (Long-term): Loans, bonds, pension obligations.

☑️ Equity:- Equity is the owners' remaining ownership stake in the company after liabilities have been subtracted from assets. This is the net worth of the business (common stock, retained earnings, etc.).
Assets = Liabilities + Equity is the formula for the balance sheet.
This guarantees the balance of the company's finances.

2) Cash Flow Statement: A financial report that illustrates the inflow and outflow of cash over a given time period is called a cash flow statement. It gives information about the company's cash flow and capacity to pay bills, make operational investments, and give shareholders their money back.

Important elements of a cash flow statement include:

☑️ Operating Activities: cash flows from the main business activities, such as payments to suppliers and employees and receipts from clients.
☑️ Investing Activities: Cash flows associated with the purchase or sale of long-term assets, such as real estate, machinery, or investments, are referred to as investing activities.
☑️ Financing Activities:-Cash flows from borrowing or debt repayment, stock issuance, and dividend payments to shareholders are examples of financing-related activities.

1) Income Statement and Balance Sheet: - The income statement, indirectly influences the balance sheet for the following reasons:

Net Income and Retained Earnings::The retained earnings will capture the net income in the income statement and transfer to the equity section of the balance sheet.

Opening Retained Earnings + Net Income - Dividends = Closing Retained Earnings'

Accrual Accounting Impacts:Revenue accrued but not received as cash is recorded as an asset in accounts receivable

Expenses incurred but not paid as cash are liabilities accounts payable.

2) Income Statement and Cash Flow Statement:The cash flow statement is based on the income statement primarily through operating activities:

Net Income Adjustment:Adjustments for non-cash expenses, such as depreciation and amortization.

Not doubly counted::Sale of non-operating assets either as a gain or a loss.

The linking between financial statements will ensure that the cash flow statement reflects an accurate and fair view of the firm's cash-generating capability.

Non-Cash Adjustments:Depreciation, amortization, and impairment impact net income but do not impact cash flows, so an appropriate adjustment is needed.

Timing Differences::Accrual accounting leads to revenue recognition and cash receipt under accrual accounting, resulting in timing differences, which do not make it easy to analyze.

Difficult Transactions::Mergers, acquisitions, or asset sales have multi-statement effects that are hard to trace.

Currency Fluctuations::For international firms, fluctuations in the exchange rate affect the valuation of assets, cash flow, and income statement metrics.