Financial statements are the lifeblood of a company. They outline the fiscal health of a business by showing the income taken in and laid out (income statements and cash flow), the outcomes of this activity (balance sheet), and if the business has investors – then a statement of their equity. The latter will be the focus of a separate blog in the near future.
Another way to explain a financial statement is to state that a balance sheet reveals a company’s holdings and debts, income statements show how money was made and spent and cash flow lists the monetary exchange between a company and customers – all for a specified period of time.
The balance sheet will name the business’s assets and liabilities (as well as shareholder equity). An asset is something the company owns outright and has value. It may be something that can be sold or utilized to move the company objectives forward – such as for making a product or delivering a service. Assets include tangible items such as equipment and inventory. Assets can also encompass intangible but equally valuable resources such as patents or trademarks. Finally, cash and investments are assets.
Assets may be current or expected to be converted to cash within a year, while non-current assets are long range items that fall outside a year’s framework. Fixed assets are those that are required to maintain the business, so they fall under the heading of non-current assets.
A liability is the opposite. It is something owed or a debt. It may be monetary or tangible obligations, employee wages, taxes or the cost to maintain the business in a brick and mortar location that is not owned by the company. It could be garnishes against the business or even the obligation to meet commitments for goods and services in the future. As with assets, they may be current or long-term. (Dividends paid out to investors fall under the heading of liability).
The income statement reveals a company’s revenue for a specific period of time – usually in increments of a quarter or a full twelve-months. The bottom line of the statement shows the company’s profits and losses. The cash flow statement shows a net increase or decrease in cash with three components – operating activities, investing activities, and financing activities.