Printable easy profit and loss statement template, A Financial statement is a company’s resume reflecting the fiscal activity of the organization. There are four important components that are part of a fiscal statement. These components would be the balance sheet, income statement, statement of retained earnings, and a statement of cash flow. A balance sheet accounts a business’ net equity, liability and assets. An income statement says a firm’ expenses, gains and income over a specific time period. A statement of retained earnings documents the changes in a business’ retained earnings within a time period. The statement of cash flow states a business’ operating, investment, and financial cash flow. All these components of a financial statement are used to judge the financial ease and action of a business. A negative or positive fiscal statement can determine whether a business is in a weak or strong fiscal situation.
The function of a financial statement is to reflect the financial weakness or strength of a business enterprise. Internally, it’s used by a company to create financial decisions like hiring new workers or even layoffs. When businesses are financially fighting they look to decrease cost and the fastest way to lower costs would be to eliminate workers. Today in a struggling market, employees are regarded as expensive liabilities, and companies and authorities are attempting to decrease those obligations as far as possible.
Understanding financial statements assist owners and managers make better choices monitoring the business and strategy for future expansion. Financial statements give a very clear grasp of the company’ strengths and weaknesses. They are essential for business owners that wish to succeed and expand their organization.
Though financial statement analysis is a highly useful tool, it has two limitations. These two constraints demand the comparability of financial data between companies and the need to check past ratios. Comparison of a single firm with the other can provide invaluable clues regarding the financial health of a company. Unfortunately, differences in accounting procedures between businesses sometime makes it hard to compare with the firms’ financial information. As an instance if a single firm values its inventories by the LIFO method and a different firm by average cost method, then direct comparisons of financial information like stock valuations are and price of products sold between both firms might be misleading. Some times enough data are introduced in foot notes to the financial statements to restate data to a comparable basis. The analyst must remember the absence of comparability of this data before drawing any certain conclusion. But even with this limitation in mind, comparisons of important ratios with other businesses and with industry averages frequently suggest avenues for further investigation.
Few figures appearing on financial statements have substantially importance standing independently. It is the connection of one figure to another and the amount and direction of change over time which are important in financial statement analysis. How does the analyst crucial in on important relationship? How does the analyst dig out the important trends and changes at a business? Three analytical methods are commonly used; dollar and percent changes on announcements, common-size statements, and financial ratios formulations.
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