- Balance Sheet: Snapshot of Financial Position
The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It follows the fundamental accounting equation:
Assets = Liabilities + Equity
Components:
Assets: Resources owned by the company.
Current Assets: Cash, accounts receivable, inventory.
Non-current Assets: Property, plant, equipment (PP&E), long-term investments.
Liabilities: Obligations owed by the company.
Current Liabilities: Accounts payable, short-term loans.
Non-current Liabilities: Bonds payable, long-term loans.
Equity: Owners’ residual interest in the company.
Includes common stock, retained earnings, and treasury stock.
Purpose:
Evaluate liquidity and solvency.
Analyze asset structure and capital allocation.
Determine financial leverage through ratios like debt-to-equity.
- Income Statement: Measure of Profitability
The income statement, also known as the profit and loss (P&L) statement, shows a company’s financial performance over a specific period. It outlines revenues, expenses, and profits.
Components:
Revenue: Income from primary operations (sales, services).
Cost of Goods Sold (COGS): Direct costs of producing goods sold.
Gross Profit: Revenue – COGS.
Operating Expenses: Administrative, selling, and other overhead costs.
Net Income: The “bottom line,” calculated as:
Revenue – Expenses – Taxes = Net Income
Purpose:
Assess operational efficiency.
Identify profitability trends.
Compare performance across time and competitors.
- Cash Flow Statement: Overview of Cash Movements
The cash flow statement details cash inflows and outflows over a period, categorized into operating, investing, and financing activities. It ensures that businesses understand their liquidity and cash health.
Components:
Operating Activities: Cash from day-to-day operations (net income, adjustments for non-cash items).
Investing Activities: Cash used in or generated by investments (purchase/sale of assets, investments in securities).
Financing Activities: Cash from financing (loans, issuing stock, paying dividends).
Purpose:
Track cash generation and usage.
Determine liquidity for operations and growth.
Evaluate the ability to repay debts and fund expansion.
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