Financial statements help businesses determine their financial position at a specific point in time and over a period. Data from your accounting journal and general ledger is used to prepare income statements, balance sheets and statements of cash flows. Information from previous reports is used to develop the next.
PREPARING AN INCOME STATEMENT
The income statement shows the overall profitability of a company during a specific period. Data from reporting accounts launch podcast journals and the general ledger are used to prepare an income statement. The statement details primary sources of income such as sales of the company’s products and services. It also shows secondary sources of income like if a company sublets a portion of its premises. Income statements outline any revenue during a period in question from assets, such as obtaining sales equipment or interest income.
Business expenses are also shown on an income statement. Primary expenses, expenses from secondary activities and losses from activity, including depreciation, are detailed on the statement. It should be noted that depreciation is only shown for the specific period being reported and not the total depreciation of an item in its useful lifecycle.
PREPARING A BALANCE SHEET
A company’s financial position at the end of an accounting cycle is illustrated on the balance sheet. A company’s assets, liabilities, and equity should be detailed on a balance sheet. Assets must equal liabilities plus equity or owner’s investment. Liabilities and equity are used to purchase assets. The balance sheet shows your company’s financial position with regard to assets, liabilities, and equity at a set point in time.
Data on a balance sheet come from the general ledger, and the format mirrors the reporting accounts podcast equation used in the general ledger. Assets, liabilities and owners’ equity on the last day of the accounting cycle are recorded on a balance sheet. Depreciation on a balance sheet differs from depreciation shown on the income statement. On a balance sheet, it is the total accumulated depreciation from the day the item was acquired to the present.
PREPARING A STATEMENT OF CASH FLOWS
Statements of cash flows help a business see if they have adequate cash flow to operate. This statement compares two periods of financial data and shows how cash has changed in the revenue, expense, asset, liability and equity accounts during these times. Statements of cash flows must be prepared last because it takes information from previously prepared financial statements. It divides the cash flows into operating cash flows, investment cash flows, and financing cash flows. The result is the net change in cash flows for a particular time and gives the business a very comprehensive view of the cash position. Statement of cash flows shows a company’s financial position on a cash basis rather than an accrual basis. This a record of the revenue actually received from a company’s customers in most cases.
What Is the Purpose of Financial Reporting?
The purpose of financial statements is to provide a business information about operations, financial positioning and cash flows. This information is used to make financial decisions regarding the allocation of resources. Specific statements are used for specific business purposes.
Financial statements can be used for many purposes including
Credit decisions: lenders to determine if they should extend credit to a business or restrict the amount of credit extended use information. Investment decisions: investors analyze statements to decide whether to invest and what price per share at which they want to invest. The information is used to develop a potential selling price for the company.
Taxation decisions: a business may be taxed based on its assets or the government using information from financial statements can derive income and that amount. Union bargaining decisions: a union to base its bargaining position based on a company’s ability to pay can use financial statements. These are just a few purposes of financial statements. A financial statement can be used for a number of purposes depending on what information is needed.
