Three Basic Financial Statements Of An Organisation Essay
1. Income Statement (Profit and Loss Statement) The income statement exhibits whether the business operations have been successful or not and helps to plan to maximize the profits of business by controlling costs or expenses. This being detailed statement of income and expenses during a given period for an organisation and becomes a very useful tool to compare variance form the actual with budgeted or percentage of change between reporting periods.
For instance, the income statement may depict that employee costs for the year is $20000 and this information become more useful when the report also shows that this amount is $ 5000 over budget and 25% higher than the same time last year.
This vital information will induce the manager to probe into possible causes of such as rising cost of the variance, any increase in number of employees or associated with higher production or due to employee’s idle time.Balance sheet: Balance sheet can be explained as a picture o the assets, liabilities and Owner’s equity of a business on a given date, normally being end of the accounting year of a company.
Assets are the resources utilized by the company while Liabilities and Owner’s Equity are both sources of funds.
It indicates whether the resources used by the business belong to the owner’s themselves or are borrowed from outside sources. Liabilities). By scrutinizing the break up of total assets, liabilities and Owner’s Equity, one can evaluate whether the business is solvent or debt-ridden. Balance sheet can be referred as “summary of an enterprise’s assets, liabilities and equity at a specific moment of time.
In other words, balance sheet reveals an entity’s possessions, obligations and other’s debts towards it.Truly, being a displayer of the firm’s financial position, the balance sheet is a useful and powerful device in the hands financial analysts, finance managers and external users. Comparison with the data on other financial statements, it structures different financial ratios like short-term and long term solvency ratios , short term liquidity ratios, asset utilization ratios and others which are the basic element for financial analysis.CASH FLOW STATEMENT: It indicates how cash was generated and how it was spent for the purpose of business, It reveals the inflow and outflow of cash in an organisation and it reports various categories like cash flow from investing activities, cash flow from operating activities and cash flow from financial activities.
It is being used by managers to evaluate whether there will be enough cash on hand to meet expenditure needs.