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The three basic financial statements of an organization

Statement 1: Income statement (statement of loss and profit)

The income statement is a vital piece of information for a business, which shows whether the operations and methods of the business in question have been successful or unsuccessful, which helps the business to make plans to maximize profits, by controlling the expenses or overheads.

The income statement is detailed over a given financial period for a business and is extremely useful in comparing the variance from the actual, with a percentage change or budget change within the given period. For example, a statement of income might report that there are $20,000 in employee costs for the financial year, which is useful in itself, but becomes even more useful when this amount is compared with the budget of the company, since they can make decisions accordingly. If costs are rising, then the manager can then delve into the reasons behind why and how such changes are happening, such as higher employment, or lower productivity.

Statement 2: Balance sheet

The balance sheet is explainable as an overall picture of the equity of a business, the assets of the business, and the liabilities of the business, over a given time period, usually at the end of the financial year. The assets are essentially the physical resources owned and used by the company, while the equity and the liabilities are both sources of income. The balance sheet thus identifies which business resources that are being utilized are the property of the business itself, and which resources are being borrowed from elsewhere (liabilities). If we separate the equity, the assets and the liabilities, we can determine whether the company is in the black or in the red. The balance sheet in simplified terms is essentially the sum of the all the assets and the costs, whether the assets are in the form of possessions or anything else, and whether the debts are in the form of possessions or anything else.

It is obvious that because the balance sheet shows exactly where the company stands financially at a given moment in time, it is a highly useful and powerful tool for analysts to use to the advantage of the company, and for external people. The difference between this and the information on other financial statements, is that it structures separate financial indicators, such as long term ratios and short term ratios, short term solvency ratios and long term solvency ratios, liquidity ratios, the use of assets ratios, and other such ratios which are the basis for detailed financial analysis.

Statement 3: Cash flow

The statement of cash flow reveals how cash is generated within the company, and what cash is spent and for what company purposes. It shows the influx and out flux of cash in the company, and separates the flow into different criteria of sources, for example cash flow from investment, an cash flow from operational and financial activities. Cash flow statements are useful for managers since it allows them to see if they have enough raw cash to spend for immediate needs.

Reference

McMahon, R. G., & Davies, L. G. (1994). Financial Reporting and Analysis Practices in Small Enterprises: Their Association with Growth Rate and Financial Performance. Journal of Small Business Management, 32(1), 9