Understanding Financial Statement In Detail

Meaning Of Financial Statements

In the business world, financial statements are written records that summaries the operations and financial performance of a company. Government agencies, accountants, and businesses routinely audit financial statements to ensure their accuracy, as well as for tax, financing, and investment purposes, among other reasons. The following are included in financial statements:

  • Balance sheet

  • Income statement

  • Cash flow statement.

Using of Financial Statement

A company's performance and future stock price predictions are based on the financial data that is available to investors and financial analysts in order to analyze and make predictions about a company's performance and stock price direction in the future. The annual report, which includes the company's financial statements, is one of the most important sources of reliable and audited financial data available to the public. It's also one of the most difficult to come by these days. Investing professionals, market analysts, and creditors rely on financial statements to assess a company's financial health and earnings prospects. The balance sheet, the income statement, and the statement of cash flows are the three financial statement reports that are most important to understand.


Financial Statement in Detail

Income Statement

Frequently, the income statement is the first place an investor or analyst will look for information when researching a company. Each period's earnings are summarized in the income statement, with sales revenue appearing at the top of the page to indicate how well the company performed during that period. The gross profit is calculated by subtracting the cost of goods sold (COGS) from the total revenue in the income statement. As a result, the gross profit is affected by other operating expenses and income, which varies depending on the nature of the business, to arrive at net profit at the bottom of the profit statement, which is referred to as "the bottom line" of the organization's operations.


Income Statement Formula and Calculation

Net Income=(Revenue−Expenses)

  • Total all revenue or sales for the period.

  • Total all expenses and costs of operating the business.

  • Subtract total expenses from revenue to get net income or the profit for the period.


What are the Data from Income Statements

In addition to the balance sheet and cash flow statement, the income statement is one of the three most important financial statements that a business can have. It summarizes the financial performance of the company over a specific accounting period. The income statement of a company, also known as the profit and loss statement or the statement of revenue and expense, is primarily concerned with the revenues and expenses that the company incurs during a specific period. It is also known as the profit and loss statement or the statement of revenue and expense.

As a result of subtracting expenses from revenues, a profit figure for a business can be calculated, which is referred to as net income in the financial statement.


What are Different Types of Revenue In Income Statement

Operating revenue is the revenue generated by the sale of a company's products or services. It is also referred to as net income. The production and sale of automobiles would account for the vast majority of an automobile manufacturer's operating revenue. Generally speaking, operating revenue is generated by a company's core business activities, which serve as the company's primary source of income.

Non-operating revenue is defined as revenue derived from activities that are not essential to the operation of the company's core business operations. In this case, the revenue is derived from activities that do not fall under the company's primary business function.

The following are some examples of non-operating revenue:

  • Interest earned on money which held in a bank account

  • Rental income from a property is a type of passive income.

  • Royalty payment receipts and other income from strategic partnerships are examples of this.

  • Profits from an advertisement display on the company's property were received.

  • Other income is defined as revenue derived from sources other than the primary business. Gains from the sale of long-term assets, such as land, vehicles, or a subsidiary, could be included in other income sources.

What are Different Types of Expense In Income Statement

It is common for a company's primary activity to generate revenue, but the company also incurs primary expenses in the process of generating the revenue. Expenses include the cost of goods sold (COGS), selling, general, and administrative expenses (SG&A), depreciation or amortization, as well as research and development expenses (RD&E). Expenses include the cost of goods sold (COGS), selling, general, and administrative expenses (SG&A), depreciation or amortization, as well as research and development expenses (RD&E) (R&D). Typical business expenses include wages and sales commissions, as well as utilities such as electricity and transportation, among other things.

In the case of secondary activities, interest payments on loans or debt are examples of expenses associated with the activity. Profit or loss incurred as a result of the disposition of an asset is also recorded in the income statement as an expense.

One of the most important functions of the income statement is to communicate specifics about the profitability and financial results of a company's business operations to investors. The ability to demonstrate whether or not sales or revenue is increasing over multiple periods can be extremely effective when comparing sales or revenue over multiple periods. Investors can also evaluate a company's management's ability to control expenses in order to determine whether a company's efforts to reduce the cost of sales will result in increased profits over time as a result of those efforts.



Balance Sheet

When the balance sheet of a company is prepared at a specific point in time, it reflects the assets, liabilities, and shareholders' equity of the company at that point in time. As is well known, assets must equal liabilities plus equity in order for a business to be profitable. Keep in mind that the cash and equivalents section should begin with a balance that is equal to the balance found at the conclusion of the cash flow statement. Following that, the balance sheet displays the changes in each major account from one period to the next. It is reflected in net income on the balance sheet that the change in retained earnings from the income statement is reflected in retained earnings on the income statement (adjusted for payment of dividends).


Balance Sheet Formula

Assets=(Liabilities + Owner’s Equity)


It has already been calculated what the balance sheet totals are, but how do you figure out what they are in the first place?

To find out how much money is on the balance sheet, look at the total assets for the time period in question. Identify and compile a comprehensive list of all liabilities, which should be included in a separate section of the balance sheet. It is possible that contingent liabilities will be excluded from the calculation. Calculate the total amount of shareholders' equity and multiply it by the total amount of liabilities to arrive at the total amount of liabilities. This means that the sum of assets should equal the sum of liabilities multiplied by the sum of shareholders' equity.


What are the Data from Balance Sheet

You can see how assets are funded by looking at the balance sheet, whether through liabilities such as debt or stockholders' equity, which includes retained earnings and additional paid-in capital. All of the assets listed on the balance sheet are listed in descending order of their liquidation value.

The order in which debts will be paid off should be noted because this is the order in which they will be paid off. In the financial world, short-term or current liabilities are debts that are expected to be paid in less than a year, whereas long-term or non-current liabilities are debts that are expected to be paid over a period of greater than a year (for example, pension obligations).


Assets

Liquid assets include cash and cash equivalents, which can include Treasury bills and certificates of deposit, among other things. In the financial world, accounts receivable are the sums of money that a company owes to its customers in exchange for the sale of a product or service. Inventory


Liabilities

Debt including long-term debt Wages payable Dividends payable


Shareholders' Equity

A company's shareholders' equity is defined as the difference between the total value of its assets and the total value of its liabilities. Shareholders' equity refers to the amount of money that would be returned to shareholders if all of the company's assets were liquidated and all of the company's debts were paid off in full. During a fiscal year, retained earnings represent the amount of net earnings that were not distributed to shareholders in the form of dividends. Retained earnings are included in shareholders' equity and represent the amount of net earnings that were not distributed to shareholders in the form of dividends during the fiscal year.




Cash flow statement

Afterwards, the cash flow statement takes the net income and adjusts it to account for any non-cash expenses that may have occurred during the period under consideration. It is possible to determine the use and receipt of cash by examining the changes in the balance sheet over time. It shows the change in cash from one period to the next as well as the beginning balance and ending balance of cash for each period in the cash flow statement.


What are the Data from Cash Flow Statement

When a company uses the CFS, shareholders can gain a better understanding of the company's operational processes as well as where the money comes from and how the money is spent. The CFS also provides insight into whether or not a company is operating on solid financial footing, which is important for investors to know.

To be clear, there is no such thing as an exact formula for calculating a cash flow statement on its own. As an alternative, it is divided into three sections, each of which contains a cash flow report for the various activities for which a company's funds are used by the company. The three components of the CFS are outlined in the following section of this document.


Operating Activities

Operational activities on the CFS include all sources and uses of cash resulting from the operation of a business and the sale of its products or services, which are categorised as operating activities. It is included in the cash from operations category any changes made to cash, accounts receivables, depreciation, inventory, and accounts payable that occur during the accounting period. In this category of transactions are wages, income tax withholdings, interest payments, rent, and cash receipts from the sale of a product or service, to name a few examples.


Investing Activities

A company's investing activities include any sources and uses of cash that result from the company's investments in the long-term future of the company, no matter how insignificant the nature of the investment may be. Amounts paid in connection with the purchase or sale of an asset, loans made to vendors, payments received from customers, and payments made in connection with a merger or acquisition are all included in this category.

Purchases of fixed assets such as property, plant, and equipment (PPE) and other similar items are also included in this category. For the sake of simplicity, any changes in equipment, assets, or investments are associated with the cash received as a result of investing.


Financing Activities

The receipt of funds from investors or banks, as well as the expenditure of funds received as dividends from shareholders, are all examples of cash generated by financing activities. Corporate financing activities include the issuance of debt and equity, the purchase of shares in the stock market, the payment of dividends to shareholders, and the repayment of debt.

The income statement and balance sheet are reconciled in three major business activities, which are summarized in the cash flow statement. The income statement and balance sheet are reconciled in the cash flow statement.


Statement of Changes in Shareholders Equity

Generally the statement of shareholders' equity is a financial document that is issued by a company as part of the company balance sheet. It depicts the changes in the value of stockholders' or shareholders' equity, or ownership interest in a company, from the beginning of a given accounting period to the end of that period, as well as the changes in the value of the company's assets during that time period. Normally, the measures of shareholders' equity in the statement of shareholders' equity fluctuate between January 1 and December 31.

A company's shareholders' equity is calculated in its most basic form by subtracting the total value of the company's assets from the total value of the company's liabilities. It is important to note that the statement of shareholders' equity emphasizes the business activities that have an impact on whether the value of shareholders' equity increases or decreases over the course of a year.


The statement of shareholders' equity typically includes the following components:

  • Preferred stock. Holders of preferred stock have a greater claim on the company's earnings and assets than do those who own the company's common stock, in contrast to those who own the company's common stock. Generally speaking, dividends to preferred stockholders will be paid out before dividends to common stockholders are distributed. Prior to being listed on the statement of shareholders' equity, preferred stock is typically listed at its par value, also known as face value, which is equal to the amount at which it is issued or redeemable at the time of listing. In the company that issued the preferred stock, preferred stockholders do not have any voting rights at all.

  • Common stock. An ownership stake in a company that entitles its holders to vote on corporate decisions is represented by this type of stock, or ownership stake in a company. Priority is given to preferred stockholders in terms of receiving payments, while common stockholders are ranked lower on the priority list than preferred stockholders. It is common for common stockholders to receive their dividends first, followed by preferred stockholders and bondholders in the event of a company's bankruptcy. When it comes to the statement of shareholders' equity, common stock, like preferred stock, is typically listed at its par value, just as with preferred stock.

  • Treasury stock. Treasury stock refers to stock that has been repurchased by the company that issued the stock. Companies may decide to buy back their own stock in an attempt to fend off a hostile takeover or to increase the value of their own shares in the market. The amount of money spent to repurchase the shares in question reduces the amount of equity that the shareholders have remaining in their respective companies.

  • Additional paid-up capital. Additional paid-up capital, also known as contributed capital, is the amount of money that investors pay in excess of the value of a company's stock's par value, according to the Financial Accounting Standards Board.

  • Retained earnings. The total amount of earnings that a company has accrued but has not yet been distributed to its shareholders is referred to as the company's retained earnings. When you subtract the amount of money paid out in shareholder dividends from the total amount of money the company has earned since its inception, you arrive at this figure. For a long period of time, a company that has been profitable will most likely be sitting on a significant amount of retained earnings.

  • Unrealized gains and losses. Unrealized gains and losses reflect changes in the value of investments as a result of fluctuations in the value of the stock market. It is referred to as an unrealized gain when the value of an investment increases but the investment has not been cashed in as of the time of writing. Similarly, an unrealized loss occurs when the value of an investment decreases, but the investment has not yet been sold, resulting in the loss of principal.