We have three basic financial statements (1) Balance Sheet (2) Income Statement and (3) Cash Flow Statement
(1) Balance Sheet - also called The Statement of Financial Position.
This reports the total Assets, Liabilities and Equity of the company as of specific time, e.g. Balance Sheet as of December 31, 2022.
Assets – company’s resources with future economic value. Examples are cash, accounts receivable, inventories, equipment.
Liabilities – an obligation or future sacrifices of economic benefits. Examples are accounts payable, salaries payable, notes payable.
Equity – owners’ share or the residual interest in assets of the business after deducting the liabilities
Assets and liabilities are classified as current or non-current depends. It is current when an asset or liability is expected to be realized or paid within one year.
Below is an example of Balance Sheet.
(2) Income Statement also called the Profit and Loss Statement
This reports the result of business operations for a specified period of time for a specific period of time.
Income Statement for the year ended December 31, 2022, this will report all revenues and expenses from January 1 to December 31, 2022. And if the income statement is for the quarter ended June 30, 2016, this cover revenues and expenses from April 1 to June 30, 2022.
In the example below, For the month ended April 30, 2022; this covers revenues and expenses from April 1-30, 2022.
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(3) Cash Flow Statement reports the inflows and outflows of cash over a specified period of time. We classify cash flows by business activities, which are (1) operating, (2) investing and (3) financing activities.
Computation of Cash Flows from Operating activities can be done using direct or indirect approach. Standard-setting bodies encouraged the use of direct method however, most companies find this difficult to follow since information is not readily available. On the other hand, indirect approach to arrive at cash flow from operating activities will begin with the net income from the company’s income statement then adjusting this amount to exclude non-cash transactions and as well as the increase and decrease in balance sheet accounts.
In the example cash flow statement above, in order to arrive net cash provided by the operating activities, we add back the depreciation expense to net income. Depreciation charges do not involve cash, that is why we are adding it back.
The purpose of cash flow statements is to help the users identify sources of outflows and inflows of cash.