Why Financial Statements Are Important A Beginners Guide

Why Financial Statements Are Important A Beginners Guide



Why Financial Statements Are Important: a​ Beginner's Guide
Accounting is​ considered to​ be one of​ those complicated yet necessary chores that keep people's financial affairs relatively clean .​
For the beginner who is​ just getting started, the process may not be the first obstacle .​
Often, it​ is​ understanding the special language used by accountants and those that work around them .​
In other words, one must wade through the jargon in​ order to​ understand what's going on .​
The first step in​ gaining understanding of​ accounting is​ to​ break concepts down to​ one fundamental point: financial statements .​
Corporations are extremely fond of​ financial statements – after all, they are required to​ have them .​
Financial statements are, in​ a​ broader sense, just timely statements of​ the financial situation of​ an​ organization .​
They hold companies accountable for how money is​ earned and spent, down to​ the very last detail .​
Financial statements are often audited by external auditors to​ ensure that the company is​ handling records properly .​
This also confirms to​ third parties that the company is​ displaying a​ fair and balanced view of​ the organization's position .​
These are also called cash flow statements .​
Like most financial concepts, financial statements can be broken down into several smaller concepts .​
They are: balance sheets, cash flow statements, and profit and loss accounts .​
Cash flow statements is​ another term for financial statements, but a​ little more specific .​
This statement shows exactly where the money goes – how it​ was made, where it​ was made, and most importantly, how was it​ spent .​
a​ business, after all, has many areas where money flows in​ and out: operating activities, investing activities, financing activities .​
To clarify, operating activities are the daily internal business a​ company relies on to​ survive .​
This may include, but is​ not limited to: collecting money from customers, paying employees and vendors, interest and taxes, or​ even revenue from interest payouts .​
Investing activities are generally investments made by the company to​ fund purchases of​ equipment .​
Finally, financing activities are those that affect the flow of​ money directly, such as​ the sale of​ common stock or​ adjustments in​ long or​ short-term loans .​
These calculations are then used to​ find the total increase (or decrease) in​ cash and investments .​
Fluctuations in​ operations, investing, or​ financing affect cash flow .​
This is​ called the net change in​ cash and marketable securities .​
From here, these calculations are checked against the balance sheet.
Wait, a​ balance sheet? Isn't that what we just did, balance?
No .​
a​ balance sheet sums up a​ company's assets, liabilities, and value at​ a​ certain point in​ time .​
Investors look to​ the balance sheet to​ determine a​ company's value based on what the company owns and what they owe to​ external sources .​
The amount of​ money invested by the shareholders affects company value in​ this way as​ well .​
The balance sheet follows a​ specific formula, where assets equal liabilities plus shareholder's equity .​
It is​ called a​ balance sheet because the two sides must balance out; after all, a​ company must pay for assets by either borrowing the money directly, or​ through shareholders .​
The balance sheet is​ clearly a​ great source of​ financial information on a​ company .​
The last line of​ defense, the profit and loss account, shows the activities of​ a​ company during a​ period of​ time .​
This differs from the balance sheet in​ that a​ profit and loss account serves as​ a​ log of​ a​ company's activities over a​ period of​ time, while the balance sheet is​ just the financial position at​ a​ specific moment in​ time .​
Some value the profit and loss account over the balance sheet, as​ it​ marks a​ longer stretch of​ time than the balance sheet does .​
Once broken down into parts, financial statements are not such a​ hard topic to​ handle, even for a​ beginner .​
Financial statements expose the practices of​ a​ company – while one does not get a​ specific blueprint of​ how a​ company makes or​ loses money, the end results are clearly displayed for people to​ see.




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