Financial statements are useful tools for recording economic activity, assessing business operations, and monitoring financial health. These financial statements are four types: income and expenses report, the balance sheet, statement of cash flow, and the shareholders’ equity. Each of the documents has an active role in the day-to-day business activities, and their interactions offer a proper framework for the success of business activities. Income statements, balance sheets, and statements of cash flows contribute to business operations’ success because they help in the organization and allocation of finances to maximize output enhance processes and help the business become organized, transparent, and accountable for its operations. firstly, income statements help arrive at the profits that the business has made over a given period (Pocketsmith). The income statement uses Profit = Revenue – expenses.
The income statement, sometimes called the statement of earnings, is useful in the provision of insights into a business or company’s operations, evaluating how efficient the management of the business is and sectors of the industry that perform lower than the others in a bid to raise the stakes and to improve performance. The income statements may also help the business determine its place concerning similar companies in the industry. Income statements cover four main aspects of the business: revenue, profit, expenses, and losses. Payment is further divided into two main categories depending on the price; operating revenue refers to the business income generated by conducting its primary day activities or business. For instance, for a company such as a store whose day-to-day activities are selling products, the primary revenue would be the income generated selling the items off the store. On the other hand, non-operating revenue refers to revenue from activities that are not specific to its business. An example of non-operating revenue is the commission earned. Secondly, profits are also called financial gain, which is the difference between the income received and the income spent. On the other hand, expenses explain the costs required to operate a business and conduct maintenance. The expenses incurred by a business may include repair and maintenance costs. Like revenue, expenses are broken down into primary and secondary activity expenses. Primary activity expenses include all the expenses that are incurred while conducting primary business activities. These include the cost of goods sold or the supporting architecture of the business(Huang, 2019). On the flip side, secondary expenses are not associated with the primary business activities such as the commission. On the other hand, balance sheets are financial statements that report on a company’s assets, liabilities, and shareholders’ equity (Franklin et al., 2018). The document is a requirement when calculating financial ratios. Balance e sheet formula = Shareholder’ equity + Liabilities. Each of the three is broken down further into accounts used
in original entries and other business operations. The tool may compare its performance pay over different trading periods, although it can be useful in comparing its performance with other similar companies’ performance. The comparison aspect makes it a valuable tool in evaluating the performance and formulation of the operation’s strategies. Assets are the first component of the balance sheet, and it refers to items of value that are owned by a business. Assets are further divided categorized into current assets and long-term assets. Current assets can be liquidated within one year, while long-term assets are items that cannot. On the other hand, liabilities are monetary resources owed to outside parties and are divided into short time frames and long-time frames. Short time frame liabilities are due within one year, for example, customer prepayments and dividends, while long-term liabilities are expected in a period beyond one year, for example, deferred tax, long-term loans, and pensions. On the other hand, shareholders’ equity refers to the monetary resources attributed to the business owners and shareholders.
Lastly, cash flow statements refer to a summary of cash equivalents entering and leaving a company. This document measures how a company manages its cash. The document, therefore, complements the balance sheet and the statement of accounts. It is also used to determine the company’s liquidity and is made up of cash from operations,
investments, finances, and the disclosure of the non-cash. Steps needed to discuss a pro forma income and expense statement with a potential investor. To discuss a pro forma invoice, one needs to calculate revenue projections while
considering possible assumptions. It is also important to have estimates for liabilities and costs thoughtfully. At this point, the evaluation of costs may come in handy. It is also essential to estimate cash flows, which estimate sales, dividends, stocks, and future incomes. Finally, an accounts chart will simplify the task by breaking down trading periods into smaller portions. Principles and steps needed to discuss a pro forma statement of cash flows with a
potential investor. First, it is essential to have the figures and facts right, and they can be obtained from statements of financial positions. Secondly, calculate the changes in the balance sheet’s opening and closing balances and feed the changes into the cash flow statement, after which adjustments for non-cash items will follow and verify all the changes made. The movement of material balance sheet items must be prepared to confirm whether the earlier steps were done successfully. The final step involves adding up the figures from the previous actions. Role of the statement of cashflows entries Cashflow summarizes the cash entering and leaving a company. Also, it is useful in measuring how well a company manages its financial resources. It has become a requirement by potential investors to determine how well a company manages resources before investing. Purpose of balance sheet entries A balance sheet is useful in monitoring the business’s progress as it shows how much a business would have left if it decided to sell all assets and pay off liabilities. It is also a useful tool in evaluating the performance of the company over different periods.
References
Pro Forma Financial Statements (with Templates and Examples): Bench Accounting. (n.d.). Retrieved November 02, 2020, from https://bench.co/blog/accounting/pro-forma- financial-statements/
PocketSmith. (n.d.). The Income & Expense statement. Retrieved October 20, 2020, from https://learn.pocketsmith.com/article/159-the-income-expense-statement Knežević, S., Mitrović, A., & Ilić, Z. (2016). Different perspectives on the cash flow statement. Hotel and Tourism Management, 4(2), 48-54.
Huang, J. (2019). Data analysis of balance sheet and income statement. Proceedings of Business and Economic Studies, 2(3).
Franklin, M., Graybeal, P., & Cooper, D. (2018). Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate. Principles of Accounting, Volume 1: Financial Accounting.
