Financial statement mirrors the health and status of your business. Sorting through various aspects such as debit, credit, income, and expenses calls for financial literacy. Accounting is a language in itself; to understand financial summary, you must be wary of a few accounting terms.
We are often approached by our clients with plenty of questions about their financial and income statements. In this post, we have listed down the most commonly and frequently asked questions.
1. What is a financial statement?
A financial report or statement digs deep and shows an organization’s assets, equity, income, cash flow, stakeholders’ position, and liabilities.
2. What does a financial statement look like?
There are different types of financial reports, and mainly a balance sheet, income statement, and cash flow statement are considered primary financial statements, typically referred to as E3 financial statements.
3. How do businesses use financial statements?
As advised earlier- a cash flow statement and an income statement with the balance sheet are the three major financial reports used by the businesses. Businesses review these reports periodically, typically monthly; however, in turbulent times, these statements play a pivotal role in budgeting, reporting, and managing key financial activities.
4. Apart from your business, which uses financial statements?
Business owners, CFOs, and CEOs use financial statements to obtain key insights into their business health; however, these are not the only people who use financial statements. Lenders, analysts, government agencies, and investors also use the three core financial statements we discussed earlier.
5. Who prepares the financial data?
Usually, financial data or financial statements are prepared by a professional accountant. To ensure the integrity of financial information, a CFO or controller is appointed who supervises the data and reporting.
6. What is an income statement?
One of the key statements of E3 financial statements, an income statement, shows the revenue generated and expenses for a particular reporting period. It is also referred to as a statement of operations or a profit & loss income statement.
7. What details are provided in the income statement?
An income statement captures key financial information such as COGS, expenditure, operating costs, net income, gross profit, gains, non-operating revenue, and the money drawn by the owners.
To arrive at the net income, one can use the following formula-
Net income= Revenue+gains – expenses+losses
8. Can income statements be of different types?
Yes indeed. There are different types of income statements, such as single-step, multi-step, and comprehensive income statements.
As the name implies, a single-step statement subtracts expenses from revenue in just one step. This is a go-to income statement for small-sized businesses looking for a straightforward income statement devoid of complexity; however, there are times when this type of income statement doesn’t suffice, and your business needs a multi-step income statement.
9. What is a multi-step income statement?
Unlike a single-step income statement, this income statement type is more detailed. It entails a company’s activities that generate profit. There are three important formulas used to determine net income.
- Gross profit= Net sales – COGS
- Operating income of business = Gross profit – operating expenses
- Net income= Operating income + non-operating items
10. What does a comprehensive income statement entail?
Also called a statement of comprehensive income, this type of income statement records both standard net income and OCI (other comprehensive income). OCI presents the gains or losses in the value of assets such as retirement funds, debt securities, or pensions.
11. What is a balance sheet?
One of the most vital financial statements, a balance sheet, captures the details such as assets, liabilities, and equity. Accountants also call it a statement of financial position.
12. What is the difference between a balance sheet and an income statement?
There is a multitude of differences between these two types of financial statements. They differ in the calculations, time frame, and also how they are analyzed. To keep it simple, an income statement shows whether or not a company has sufficient revenue to cover its expenses. On the other hand, a balance sheet helps determine the company’s creditworthiness. It also helps determine the company’s debt-to-equity ratio.
An income statement offers vital insights into the company’s performance in terms of profit and loss, which is why it is also referred to as a profit & loss statement.
13. What are budget financial statements?
Budgeted financial statements comprise income statements, balance sheets, statements of retained earnings, and cash-flow statements. Budgeted financial statements must not be mistaken for budgeting with the help of important business financial statements.
Summing it Up
As a business owner, you want to see your business in good shape. Accounting is one key way to determine how your business is performing. More often than not, you count on a professional accountant to help you with accounting, but it is good to be aware of the financial terms of accounting and bookkeeping.
FinAccountants is a reputed financial management services provider offering a wide array of services, such as CFO, cloud accounting, and compliance services, to name a few. If you have questions about any of these services or how FinAccountants can help you, feel free to connect with us.