A business owner relies on financial statements to find out about the performance and condition of past and future operations. It is considered the lifeblood of any business because it clearly provides an idea which direction your business is heading.
There are three important elements that should be found in your balance sheet: equity, liability and asset. The equity refers to the capital of a business. It is considered to be the major source of money that is used for sustaining and supporting a business operation. When reading the equity account, it is important to check the number of stocks. When there is high equity balance, this is a good indicator that you are able to grow or sustain your business. The opposite indicates that business operation is not doing well.
The liability provides all the outstanding loan obligations of your business. When you look at the liability account, you will be able to see the balances for notes payables, bills payables, accounts payables and other types of payables. When a business has high amount of liability, this can be an indicator that it is struggling with sustaining its operation.
The asset adds worth to your business. When you check the asset, you will be able to know the short-term and long-term investments, fixed assets, receivables and many others. This section will allow you to identify if your business can grow or sustain operation. This will also help you determine if your business will close down.
The Income Statement Report allows you to gauge your business’ overall performance by looking at the profit or loss in a given period. The income statement comprises of the revenue, profit/loss before tax, profit/loss after tax, income tax and expenses.
The Revenue shows the amount of sales obtained in a particular period. The sales may be obtained from the sales price of goods sold or service fees. It will greatly depend on the business type being run. A high amount of revenue is a clear indicator that a business has good sales and marketing process. However, a high amount of revenue should not be used as an indicator that a business is profitable.
The Expenses signify the amount of cost to produce an item that is sold. Some examples of expenses include cost of the service, interest expense, depreciation, material used, bad debts expenses, etc. The expenses account tells you if your business is investing on marketing or spending on product improvements. The expenses will also tell you if you give benefits and high salary to employee or just wasting your money.
The Profit before tax refers to the amount of sales, which is higher than the amount of cost to produce. On the other hand, Loss refers to the amount of sales lower than the cost to produce. Seeing loss in your report means that business operation is not doing good.
The Income Tax is the amount of obligation that the business has to pay to the government. The income tax can be determined by checking the country where your business operates as the Income is determined from the tax rate derived from a particular country multiplied against the Profit Before Tax.
The Profit/Loss After Tax is determined once the income tax to be paid is identified. You can compute the actual amount of profit or loss once the applicable amount of tax is deducted.
Cash Flow Statement
There are two types of Cash Flow Statement: Direct Method and Indirect Method. Direct Method refers to cash disbursements and condensed cash receipts. Indirect Method refers to the cash movements, obtained by adjusting the net income for items, which affected reported net income but did not affect cash.