BUSINESS FINANCIAL STATEMENT

According to Wikipedia, “Financial statements are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to understand”.

Whether you are conducting business as a freelancer, solopreneur or a one-person corporation, these reports are crucial to business growth and prosperity. Specifically, what are these reports all about?

One report tells how well business is performing — Income Statement; Another one shows how far invested capital has grown — Statement of Changes in Equity; What condition has the business been to date — Balance Sheet; How are cash is being generated and used — Statement of Cash Flows; And other details to communicate the overall financial information — Notes to Financial Statements.

Can anyone prepare these reports without having to get formal accounting education? For small to moderate businesses, yes! One just needs to understand a few basics, but for large companies, preparing these reports is complex and would need the skills of accountants.

What few basics does one need to competently prepare these financial business reports?

1st. Just like a family, each of these reports is dependent on one another. One cannot be completed without the other.

2nd. Each report is a connecting solution to solve an entire puzzle. The figure computed on one report is the same exact figure desired by another.

3rd. All the reports use only basic operations such as addition (+) and deduction (-) and no other complex formulas are involved.

The income statement or formally known as Statement of Operating Results has this basic computation REVENUES — EXPENSES = NET INCOME (OR NET LOSS). The net income is then forwarded to capital statement known as Statement of Changes in Equity which has this computation CAPITAL BEGINNING + NET INCOME = CAPITAL ENDING.

The capital ending is then forwarded to the balance sheet or Statement of Financial Position which has this computation ASSETS = LIABILITIES + CAPITAL ENDING. Of course, the assets contain cash which is broken down in the Statement of Cash Flows which has this formula CASH SOURCES — CASH USES = INCREASE IN CASH (or decrease) + CASH BEGINNING = CASH ENDING.

The final report is the Notes to Financial Statements which contains relevant details and computations to support the contents of the other financial statements.

Would you like to learn more about the relationship illustration of financial statements?

Watch the lesson link to learn and start your journey to the financial statement basics. Kindly subscribe first and proceed to Business Lesson 2 — Financial Statements Overview.

Watch and subscribe here LEARNING SPACES