Understanding Key Financial Reports- The Balance Sheet, Income Statement, and Statement of Cash Flows

Understanding Key Financial Reports- The Balance Sheet, Income Statement, and Statement of Cash Flows

Contents of Financial Reports

According to Revsine et al. (2012), a balance sheet contains a company’s assets, liabilities, and shareholder equity. The balance sheet is primarily used to compute the rate of investor return and to create the company’s capital structure. In short, a balance sheet gives a snapshot of what the company owns and other details, such as shareholder investment. On the other hand, the income statement shows a company’s revenue and expenses. Since the income statement shows whether the business is making a loss or profit in a given time, it can measure its financial health. Finally, the cash flow statement measures the cash and its equivalent that flows into and out of business.

Data Relations

The balance sheet shows how a company’s assets will be funded using liabilities such as debt or shareholder equity. Asset items are listed in the order of liquidity. On the other hand, revenue and income are the primary features of an income statement. Subtracting expenses from revenue gives profit, also known as net income. Finally, a financial cash flow statement shows how a company uses its cash to operate, for financing, and to invest (Revsine et al., 2012).

Support Decisions

Firstly, a balance sheet primarily determines the amount of money the company will pay shareholders as dividends. Also, a company can decide the amount to keep in the company as retained earnings to reinvest back into the business. An income statement is used to test managerial decisions, such as reducing operating costs. Finally, the financial cash flow statement helps an investor gauge a company’s financial performance and decide whether they will invest (Joshua, 2020).

Managerial Action Based on Financial Reports

Based on the results of an income statement, managers can decide whether internal costs are justified or not. If profits decline due to high sales costs, it is critical to cut them. One way to reduce sales costs is by lowering sales personnel.

References

Joshua, A. (2020). Analysis Of Financial Statements In Performance Assessment Of Selected      Banks In Nigeria.

Revsine, L., Collins, D. W., Johnson, W. B., Mittelstaedt, F., & Soffer, L. C. (2012). Financial reporting and analysis. McGraw Hill.

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Prepare an essay defining and explaining the three key financial reports: The Balance Sheet, The Income Statement, and The Statement of Cash Flows

Based on your research and what you have learned so far:

Describe the focus and content areas of each of the three reports.

Explain how the data in the three reports are related.

Compare and contrast the three reports to determine their relative values as support tools for decision-making.

Identify at least two different types of actions that managers might take based on the data contained in each of the reports. Explain why these types of actions should be based on the information in the respective report.