Introduction to the Three Financial Statements
Financial statements are a collection of reports about an organization’s financial results, financial condition, and cash flows. Commonly, fiscal year is 12 months; and interim period is quarterly. Financial Statements show us the money (cash flow). They show us where a company’s money (cash flow) came from, where it went, and where it is now. Concisely, the changes in assets and liabilities that we see on the balance sheet are also reflected in the revenues and expenses that you see on the income statement, which result in the company’s gains or losses. Cash Flow Statements report a company’s inflows and outflows of cash. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets. No single financial statement tells the complete story. Taken together, however, they provide very meaningful information for investors. And information is the investor’s best tool when it comes to investing wisely.
An income statement is a report that shows how much revenue a company has earned in a given period of time. The income statement answers the question - "Is it making money?"
The balance sheet shows investors how much a company owns (its assets), how much it owes (its liabilities), and the difference between the two (its equity) at a specific point in time. Total assets = total liabilities + total equity.
Double Entry Accounting
Double entry accounting is an accounting framework to keep track movements on the balance sheet. We will use uncomplicated way to illustrate concept of double entry accounting and how this relates to the accounting equation.
Balance Sheet – Assets
Assets are things that a company owns that have value which are expected to provide future benefits. Assets include physical property and things you can't touch but still exist and have value.
Balance Sheet – Liabilities
Liabilities are amounts of money that a company owes to others where will result in, directly or indirectly, less cash in the future.
Balance Sheet – Shareholders’ Equity Statement
The Shareholders’ Equity Statement explains the changes in owners’ equity during reporting periods. The beginning and ending balances for line items reported in the owners’ equity section of the Balance Sheet are reported in the Shareholders’ Equity Statement.
Cash Flow Statement
Cash Flow Statement reports a company's cash inflows and outflows changes over a period. The cash flow statement helps solve many of these problems by providing a link between the income statement and the balance sheet.
Cash Flows from Operating Activities
The cash flows from operating activities (CFO) section provides the best picture of how well a company's operations are generating cash that ultimately benefits shareholders.
Cash Flows from Investing Activities
Cash Flows from Investing Activities shows the amount of cash companies spend on investments, such as capital expenditures, monetary investments and acquisitions of other businesses.
Cash Flows from Financing Activities
Cash flows from financing activities includes any activities that involve the company's owners or creditors, such as debt, dividends, and issuing or repurchasing shares.
Net Change in Cash
Net change in cash in the Cash Flow Statement is the increase or decrease in cash and cash equivalents from the beginning to the end of a year. Positive net cash flow means the firm has more cash, and negative cash flow means the firm has less.