Financial report and analysis is an essential tool for understanding how much your business makes, what it spends, what it owns, and what it owes to determine your financial health. This essential information can be found in financial reports analysis such as the balance sheet, income statement, and cash flow statement. And the same is required by stakeholders, and in the case of companies, it is a statutory requirement. In this article, you will discover how to evaluate each of them step by step. It’s not a difficult task. You will need to learn only a few terms, but we have explained them in the easiest way possible.
Analysis of income statement
The income statement tells us if the company has made any profit. In a nutshell, the income statement shows you how much revenue the company generates, its expenses, and income. The numbers on the statement refer to a specific period, like a quarter or a year. Although income statements are beneficial, they do not represent the exact situation going on in the real world. That’s why you need some other statements as well, which brings us to our next one.
Balance sheet analysis
The balance sheet provides you with a summary of a company’s financial status on a particular day. It shows how much money a company has (Assets), how much money it owes (Liabilities), as well as how much money it is worth (Shareholders’ Equity) on the day the balance sheet was prepared.
Cash flow analysis
It’s one of the more straightforward statements because it records how much money comes in and goes out over time. This may appear to be the same as the income statement, but it is not. A business can purchase and receive inventory but not yet pay for it. A positive cash flow indicates that the firm has more cash at the end of the term than it did initially, whereas a negative cash flow means that the company has less cash at the end of the term than it had at the start. Because cash is liquid and is needed for day to day operation of a business, the cash flow statement is critical.
Due to GAAP accounting standards, a business can record a profit on the income statement while having a negative cash flow, resulting in them running out of funds and being unable to pay their payments.
Financial ratio analysis
A typical financial ratio is calculated using information from the financial statement. Before we can begin to understand financial ratios, we must first understand some of their characteristics. Accounting policies might differ between firms and financial years. Before estimating the financial ratio, a fundamental analyst should be aware of this aspect and change the data appropriately.
Now that you know the basics of financial report analysis, you can start updating your records accordingly. Hire any accounting firm that provides other accounting assistance like bookkeeping, payroll, and budgeting & forecasting services to ease the process.
