This discussion paper will focus on the purpose and importance of financial statements, financial planning, and financial information users. This article will seek to explore, compare, and understand the several different factors that contribute to the topics mentioned above.
Structure and Purpose of Main Financial Statements
Before analyzing different types of financial statements, we must aim to understand what a financial statement is. A Financial statement is a formal recording of the other economic activities of an individual, business, or entity. All relevant financial information must be inputted and presented in a structured manner to ensure easy understanding.
The primary financial statements are the Profit & Loss Account, Balance Sheet, and Cash Flow Statement. Each financial statement is significant and crucial to an organization. Provided below are definitions of different types of financial statements. A base is established to differentiate between all three.
Profit and Loss Account
A financial statement that assesses a company’s financial performance and position by measuring its economic activities over a specified accounting period is calculated annually. This financial statement is structured in a summarized manner to conclude the profitability of a business is mainly aimed at concerned stakeholders such as potential investors. A profit and loss statement is a financial statement that helps summarize revenues, expenses, and costs incurred during a specified period. These records provide information about the company’s abilities or inabilities to generate income and profit with the increased revenue, either reducing costs or both.
Balance Sheet
A balance sheet is a financial statement that summarizes the company’s shareholder equity, assets, and liabilities at an identified point during the fiscal year. The three mentioned above are in three different sections with a balance sheet. The main aim is to provide stakeholders such as investors with a bright idea and understanding of what the company owns and owes and how much has been invested by other stakeholders’ shareholders. In short, a balance sheet covers assets, shareholder’s equity, and liabilities. The purpose is to give the interested parties an idea of where the company stands financially and what the company owns or owes. It is a complete financial summary.
Cash Flow Statement
A cash flow statement is a statement that delivers aggregated data on the Cash inflow and outflow of the business, considering finances in relevance to ongoing operations, external investment sources, etc. Cash Flow Statements can be produced on existing data and then carried forward to forecast future cash flow activity. A business or a stakeholder uses this technique to assess the business’s financial performance and position.
There are many differences between these different financial statements simply because each one aims to provide financial decision architects with varying types of information necessary for the company.
The Main Differences Between the Three Types of Financial Statements
The Profit and loss account provides overall accumulated data of operating costs, operating profits, revenue, and more for the whole year. In contrast, the balance sheet offers detailed data against the fixed assets, current assets, equity, and liabilities. Furthermore, the balance sheet doesn’t provide as much detail on the inflow and outflow of money as the cash flow statement. In contrast, the cash flow statement offers extreme detail on where the money is consumed and received. For example, the cash flow statement states all the operating activities and accumulates the total net cash generated from those activities.
All in All
In the end, what is empirical and yet, at the same time, imperative to mention here is that the interpretation of financial statements is vital. This ratio analysis is of utmost importance, and most financial decisions and forecasted figures happen on such ratios.
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