Question

What sort of financial and accounting reports or tools do companies typically create so that the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) can keep track of critical indicators of the company’s financial health?

Answer 1

It's very important for a company to know its financial position so that correct actions should be taken to make improvements.

Financial and accounting reports such as balance sheet and cash flow statements and profit and loss account and income statement prepared by the company helps in keeping track of indicators of companies financial health.

Financial statements refers to the records written that contributes in conveying the business activities and financial performance of a company.

Financial statements includes : Income statement, Balance sheet and cash flow statement. These statements are audited by government agencies, accountants, firms and businesses to ensure accuracy and for tax, financing or various investment purposes.

A company's CEO orr CFO are dependent on this financial data to analyze the performance of a company and make predictions regarding future planning for the company's stock price.

The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential.

The income statement mainly focuses on company's revenue and expenses for a particular financial year. The expenses and revenue are minted and then expenses are subtracted from revenue to find the net income of the company which is the company's profit.

The balance sheet provides an overview of assets, liabilities and Stockholders equity.

The cash flow statement is used to measure how well a company is generating cash to pay its debt obligations, fund its operating expenses and fund investments.

Let us now understand how the income statement contributes to keep a check on financial health of the company.

The income statement covers a range of time, which is a year for annual financial statements and it is a quarter for quarterly financial statements. Income statement provides an overview of revenues, expenses, net income and earnings per share. It usually provides two or three years of data for comparing and coming to results as to in which area and what types of measures should be taken to improve the financial position of the company.

Income statement helps to find the net income of the company. The formula for this is (Revenue - Expenses).

1. Total all revenue or sales for the period.

2. Total all expenses and costs of operating the business.

3. Subtract total expenses from revenue to achieve net income or the profit for the period.

An income statement is one of the three important financial statements used for reporting a company's financial performance over a specific accounting period. It is also known as the profit and loss statement which prim focuses on a company's revenue and expenses during a particular period.

If the revenue is greater than the expenses, then its a good sign that company is going well. This tells which section is giving more profit and which are lagging behind. Various factors can be made to improve the profits generated by the company using this income statement.

Types of revenue:

Operating revenue is the revenue earned by selling a company's products or services. The operating revenue for an auto manufacturer would be realized through the production and sale of autos. Operating revenue is generated from the core business activities of a company.

Non operating revenue is the income earned from non core business activities. These revenues fall outside the primary function of the business.

Some non operating revenue examples include interest earned and rental income.

The understanding of balance sheet is as follows:

The balance sheet provides an overview of a company's assets, liabilities, and stockholders' equity as a snapshot in time.

The balance sheet formula:

Assests = Liabilities + Owner's Equity

The balance sheet totals will be calculated already, but here's how you identify them.

1. Locate total Assests on the balance sheet for the period.

2. Total all liabilities, which should be a separate listing on the balance sheet. It may not include contingent liabilities.

3. Locate total shareholder's equity and add the number to total liabilities.

4. Total assets should equal the total of liabilities and total equity.

Data from the Balance Sheet :

The balance sheet identifies how assets are funded, either with liabilities, such as debt, or stockholders equity such as retained earnings and additional paid in capital. Assets are listed on the balance sheet in order of liquidity.

Liabilities are listed in the order in which they will be paid. Short tem or current liabilities are expected to be paid within the year, while long term or non current liabilities are debts expected to be paid in over one year.

Items included in the balance sheet are cash and cash equivalents, accounts receivables, inventory in assets. In liabilities it includes debt including long term debts, rent, tax, utilities, wages payable, dividends payable.

Understanding cash flow statement

It measures how well a company generates cash to pay its debt obligations, fund its operating expenses and fund investments. The cash flow statement complements the balance sheet and income statement.

This cash flow statement would help the CFO and CEO to understand how a company's operations are running, where its money is coming from and from where money being spent. This also provides insights as to whether a company is on a solid financial footing.