Basic of Financial Statement

'Financial Statement' of Companies 

Financial Statement of company is the measuring tool for checking the health of company. It is one of the vital piece of basic analysis.that is useful for experts for contributing purposes. While investigators dig into budget summaries and attempt to find the not really evident parts of an organization's accounts, understanding the fundamental fiscal reports by and by is adequate for a speculator much of the time.

There are three Primary financial statements: Statement of Profit & Loss Account (income statement), The Balance Sheet, and the Statement of 'Cash Flow Statement' (other than that change in equity statement also made that have not that much material). Balance sheet reflect position the assets and liabilities of a company. Statement of Profit and loss statement reflect  company's profitability. And Cash flow statement is reflect the cash flow inflows and outflows from various activities of the company (i.e. Operating Activities, Financing Activities, and Investing Activities).

Balance sheet

The balance sheet is called as"Balance Sheet" because it is always balanced according to this relationship: Total Assets = Liabilities + Shareholders' Equity.

A balance that does not balance is simply wrong. The balance sheet shows the assets a company has, the liabilities it has, and the funds contributed by its shareholders.

Assets include many heads like Trade Receivable, Plant & Machinery, inventory, goodwill, patents, brand value, cash and cash equivalent etc. Liabilities include Debt (long and short term) and any other accounts payable that a company has, provisions created by companies and Shareholders’ funds are in the form of 'equity' and 'reserves & surplus'.

'Debt/Equity ratio' is one of the tool that help you to identify the burdened of debt the companies. Higher the ratio means Higher risk for default of repayment. lower the ratio indicated lower.When a company has a strong balance sheet, it has more assets and equity than liabilities.

Profit and Loss Account

 The profit and loss statement informs about a company's profitability. The simple formula for calculating profits is Profit (loss) = Revenue - Expenses.

The 'revenue' header usually has two entries: 'revenue from operation (sales revenue) and other income (other revenue)'. Another revenue is revenue from sources other than the central area of ​​the company's operations. For example, it could be investment income, dividends, royalties, interest from fixed deposit etc.

The heading 'expenses' constitute the categories of expenses, such as raw material costs, employee costs, depreciation etc. 'By subtracting total costs from total revenue', we get 'Net Profit or (Loss)'.

To reach the final result, any miscellaneous income or loss must be added to or subtracted from operating profit. Finally, net income is obtained after deducting the applicable tax.

Cash flow statement

The 'Cash flow statement' shows the cash flow in a business. Although companies can distort their profits through accounting juggling, they cannot falsify the movement of cash. Therefore, a cash flow statement provides a true picture of a company's financial health. However, there is limited use of cash flow for bank and financial instituitions, as it follows a different business model from other types of business.

The cash flow statement has Three components: 1) cash flows from operating activities, 2)financing activities, and 3) investment activities. The financial statement also mentions the company's current financial position.

What you need to check in the data is whether the flows of operating activities are positive or not. If they are positive, it tells that the company can make cash from its activities. If they are negative, it tells that the company is losing money from the activities. 

The cash flows from financing activities show the money raised for the company's operations or the money paid for the payment of the debt. The first will be a positive number in the statement, while the last will be a negative number.

Cash flows from investing activities confine the cash used and payments made in investments. For example income from investment in the form of interest, dividend or capital gain etc. 

The balance sheet, profit and loss account (income statement), and cash flow contain the necessary data to guide investors who wish to invest in a company. The indices used in the stock analysis also require numbers and data contained in these statements, without which a complete analysis is impossible.

 So basically if you know about these three statements you can understand and calculate how the company is running and working. what are their costing factor, what are their revenue generating activities etc. 

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