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Successful business people have a solid understanding of the three financial statements prepared under U.S. Generally Accepted Accounting Principles (GAAP). A complete set of financial statements helps stakeholders \u2014 including managers, investors and lenders \u2014 evaluate a company\u2019s financial condition and results. Here\u2019s an overview of each report.<\/p>\n
1. Income statement<\/strong>\u00a0<\/span><\/p>\n The income statement (also known as the profit and loss statement) shows sales, expenses and the income earned after expenses over a given period. A common term used when discussing income statements is \u201cgross profit,\u201d or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product.\u00a0<\/span><\/p>\n Another important term is \u201cnet income.\u201d This is the income remaining after all expenses (including taxes) have been paid.<\/p>\n 2. Balance sheet<\/strong><\/p>\n This report tallies the company\u2019s assets, liabilities and net worth to create a snapshot of its financial health. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.\u00a0<\/span><\/p>\n Net worth or owners\u2019 equity is the extent to which the book value of assets exceeds liabilities. Because the balance sheet must balance, assets must equal liabilities plus net worth. If the value of your liabilities exceeds the value of the assets, your net worth will be negative.\u00a0<\/span><\/p>\n Public companies may provide the details of shareholders\u2019 equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.<\/p>\n 3. Cash flow statement<\/strong><\/p>\n This statement shows all the cash flowing into and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.\u00a0<\/span><\/p>\n Although this report may seem similar to an income statement, it focuses solely on cash. It\u2019s possible for an otherwise profitable business to suffer from cash flow shortages, especially if it\u2019s growing quickly.\u00a0<\/span><\/p>\n Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. To remain in business, companies must continually generate cash to pay creditors, vendors and employees. So watch your statement of cash flows closely.<\/p>\n Ratios and trends<\/strong><\/p>\n Are you monitoring ratios and trends from your financial statements? Owners and managers who pay regular attention to these three key reports stand a better chance of catching potential trouble before it gets out of hand and pivoting, when needed, to maximize the company\u2019s value.\u00a0<\/span><\/p>\n [\/fusion_text][\/fusion_builder_column][\/fusion_builder_row][\/fusion_builder_container]<\/p>\n","protected":false},"excerpt":{"rendered":" [fusion_builder_container hundred_percent=”no” equal_height_columns=”no” menu_anchor=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” background_color=”” background_image=”” background_position=”center center” background_repeat=”no-repeat” fade=”no” background_parallax=”none” parallax_speed=”0.3″ video_mp4=”” video_webm=”” video_ogv=”” video_url=”” video_aspect_ratio=”16:9″ video_loop=”yes” video_mute=”yes” overlay_color=”” video_preview_image=”” border_size=”” border_color=”” border_style=”solid” padding_top=”” padding_bottom=”” padding_left=”” padding_right=””][fusion_builder_row][fusion_builder_column type=”1_1″ layout=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” border_position=”all” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” center_content=”no” last=”no” min_height=”” … <\/p>\n