Financial statements are a collection of reports about your company’s financial results, financial condition, and cash flows. They are useful for the following reasons:
- To determine the ability of a business to generate cash, and the sources and uses of that cash.
- To determine whether a business has the capability to pay back its debts.
- To track financial results on a trend line to spot any looming profitability issues.
- To derive financial ratios from the statements that can indicate the condition of the business.
- To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements.
Financial statements are comprised of three basic reports:
- Income Statement – presents the revenues, expenses, and profits/losses generated during the reporting period. This is usually considered the most important of the financial statements, since it presents the operating results of your business.
- Balance Sheet – presents the assets, liabilities, and equity of the entity as of the reporting date. This is typically considered the second most important financial statement, since it provides information about the liquidity and capitalization of your business.
- Statement of Asset Depreciation – depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value over time. Businesses depreciate long-term assets for both tax and accounting purposes.
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