Financial statements are considered the report cards of a business. No matter what kind of experience a business owner may have, it's always important to understand exactly not only how to read these types of documents, but also how to create and analyze them as well in order to better understand your finances.
In other words, financial statements are designed to tell a business owner how much money they have, how much debt is owed, how much income is coming in every month, and how much money is being spent in terms of expenses.
Here are four useful ways to help with both reading and understanding financial statements.
Set a time period
First and foremost, make note of the exact time period that is covered by the financial report itself. Generally, you will be able to find this listed either at the top of the report or any of the statements contained within the report, depending on which specific section you need to look at the most.
The balance sheet
The balance sheet is perhaps one of the most important sections of a financial statement. This section lists all of the assets and liabilities of a company. In many of these types of reports, the assets can be found listed on the right side, while the liabilities will generally be found on the left side. However, some reports will have the assets listed on the top, while the liabilities will be listed below them. Assets will typically include factors such as cash, investments, property, and other things that are owned by the company itself and that also have some type of value. Liabilities, on the other hand, are obligations and/or debts that are owed to other entities by the company
The income statement
The income statement is another important part of a financial statement, as this details exactly how much money a company has earned over the period of time that is specified in the statement itself. Additionally, any funds that have been spent in terms of earning that income will also be detailed in the statement. The top line of the income statement will either feature “sales” or “gross revenue” and will reflect how much money a company has made prior to any expenses being deducted. Operating expenses will also be listed in this section as well, which include business costs, advertising, salaries, and other miscellaneous expenses. The final line of the income statement will reflect the company's overall net profit or loss over the specified period of time.
Cash flow statement
Another important part of a financial statement is the cash flow, which specifies exactly how much money a company currently has available. Additionally, it is also designed to keep track of how much money is coming in and out of a company during the specified period of time.
These are just a few simple ways to help with reading and understanding a financial statement. As previously mentioned, it all depends on how a specific company is set up as to how a financial statement will appear during a specified period of time.
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