Before learning about financial statements, it’s crucial to understand how these documents work. They are a snapshot of its business, products, services, and macro-fundamental events. The numbers on a company’s financial statements are often easier to interpret when you understand these facts. Before you can analyze the numbers, you need to get your best bookkeeping app ready to understand the business model, products and industry, and the company’s current situation.
Understanding these big three: statement of financial position, income statement, and the statement of cash flows will significantly help the company’s financial condition.
Statement of Financial Position
Also known as the balance sheet, it shows a company their resources and how they’re financed—capital investment or liability. This sheet lists a company’s assets, liabilities, and capital at the reporting date, providing insights using ratios and metrics.
Leverage ratios, for example, can be used to assess a company’s ability to meet its financial obligations. The debt-to-equity balance can help determine if the company relies too heavily on debts to function. The business’s operating liquidity can be viewed as working capital. It is calculated by subtracting current (short-term) liabilities from its assets.
Income Statement
The income statement is a good starting point for understanding a company’s financial health. Depending on the type of business, you may want to know the details of the company’s cash flow to make informed decisions about its future. This document often includes and summarizes the cumulative effect of an accounting period’s revenue, gain, expense, and loss transactions.
By understanding how it works, you can make informed decisions about its financial health. If you’re a business owner having simple business accounting software that tackles the income statement is the best tool for determining your future success.
And to learn more information about cash flow statements, check out this infographic by KIPPIN.