Question

Explain what information is provided by the balance sheet and its value. What are the other financial statements?

Answer 1

Financial statements help a firm's investors in understanding how the firm is faring financially based on which they can make a decision whether to invest in it or not. They help in understanding the financial health of the firm. The most important financial statements that a firm would require preparing periodically include balance sheet, Income statement and the cash flow statement.

Below is the purpose of each of these statements for the business -

Balance sheet - Balance sheet shows the current value of the business by detailing the assets and liabilities that the business holds. Balance sheet can be prepared at any point of time and need not be generated on a periodic basis. Balance sheet displays the financial health of the firm by providing all the details of assets which include fixed and movable assets, liabilities which include loans, debts etc., investments that the firm made etc.

Income statement - Income statement which is also called as Profit and Loss statement provides a detailed report of the firm's revenues from the sale of the goods and all the expenses involved in producing and selling the goods. The difference between the sales and the expenses is the net income that the company holds at the end of the period. This statement helps the investors understand whether the business is making profits or losses.

Cash flow statement - Cash flow statement helps the investor in understanding the cash inflows and cash outflows of the firm during a period. It consider net income (profit or loss) from the income statement as the starting point or opening balance and adds cash inflows while subtracting cash outflows from the business. It shows how the money is spent in the period and helps in tracking the amount in the bank to be kept covering future needs as they arise.