Financial Statements
Description of the Financial Statements
Financial statements are fundamental in measuring and gauging the real financial strength of a company. These statements provide measureable data for reports and aid the investor to gain an understanding of a company's imminent prospects and risks (Taparia, 21). The financial activities of any company's business operations and transactions are summarized in three basic financial statements. These are the income statement, balance sheet, and cash flow statements.
The income statement is a financial report, which gives an accounting of the company's income for a certain period of time. Principally, this includes the revenues and expenses that bring about such income. The income statement is also referred to as the profit and loss statement and reveals how an entity has performed by showing the revenues and the expenses and the amount of resultant profit or loss. Items of the balance sheet include revenue, cost of goods, expenses, operating income, tax paid, and the net income as well (Taparia, 21).
The income statement is based on the matching principle which asserts revenues for a certain period of time being analyzed ought to match with expenses in the same period. This practice, accrual accounting, gives rise to the recording of income when a sale takes place and an expense when it is incurred (Taparia, 22).
This is because, income statements can reveal the operating financial results of an entity, for instance, the sales and the costs and therefore enables the investor to assess the performance of the entity and thereby be able to assess future cash flows (Taparia, 28).
Secondly, the balance sheet is also known as the statement of financial position. This financial statement reports the assets of an entity, its liabilities, and the equity levels as well. It presents information on the financial strength of a company, how incomes are utilized, the cycles of receivables and payables and also equipment (Taparia, 28).
The balance sheet gives a presentation of the financial relationships between the assets of the company which are the resources being managed by the company and the liabilities which are the responsibility of the management of the company to creditors and owners or shareholders. The components of the balance sheet include assets and liabilities, both for the short run and for the long run and equity from the shareholders. Assets include items such as equipment, goodwill, and land while liabilities include items such as loans and payables (Taparia, 28).
The cash flow statement of a company provides the users of financial statements with a foundation…
