Demaurio Clark for any businessman who is aspiring to manage their business finances well, it is important to have a fundamental understanding of the financial statements. There are three types of financial statements which are:

  1. Income statement
  2. Balance sheet
  3. Cash Flow statement

These three statements are linked intricately with each other. In this guide, we will discuss further the functions and significance of these financial statements.

Demaurio Clark overview of financial statements

Income statement

The first place a financial analyst or investor will look for when they have to make an informed decision about investing in a company or to analyze the financial health is the income statement. The income statement will show the given business’s performance through a given time by displaying the sales revenue of the business at the top. Going further, the statement will show the cost deductions in terms of the cost of goods sold (COGS), which will denote the gross profit. Further, as Demaurio Clark points out, gross profit may also get affected by operational expenses based. On the industry’s nature and business to show up the bottom line of the business finally.

Key features of the income statement are:

  • Show up all the revenues and expenses over a certain period as one quarter, six months, or one year.
  • It is used to assess the profitability of a business.

Balance sheet

The balance sheet is another key financial statement that displays the company’s assets, equities, and liabilities. As it is known popularly, the organizations’ assets must match all the liabilities. Plus the organization’s equity. The asset section starts with the cash and other equivalents, which must equal the balance found at the end of the cash flow statement. The balance sheet displays all the changes in each account for a certain period. The net income from the income statement then goes into the balance sheet to the retained earnings.

Key features of the balance sheet are:

  • Showing the financial position of a given business.
  • Provide a financial snapshot of the company at a given point in time.
  • The balance sheet shows assets, liabilities, and shareholders’ equity, i.e., Assets = Liabilities + Shareholders Equity.

Cash flow statement

The cash flow statement shows the net income and then adjusts it against the non-cash expenses. Using the changes in the balance sheet, receipt, and usage of the cash is found. The cash flow statement will display the change in cash over a given period and the beginning balance and the ending balance of the cash.

Key features of the cash flow statement are:

  • It reflects the increase and decrease in cash over a specific period as quarter or year etc.
  • It undoes all accounting principles to show plain cash movements.
  • The cash flow statement has three sections as
    • Cash from business operations
    • Used in investing
    • Cash from financing
  • The statement shows the net change in the cash balance from the beginning to the end of a certain period.

Knowing the fundamentals of these three primary financial statements is important for the business owners and investors to diligently follow the organization’s financial health and make informed decisions.

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