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Financial Statements

Financial statements are formal records that summarize your business's financial activities and position. They're essential for decision-making, stakeholder communication, and regulatory compliance.

The Three Primary Financial Statements​

1. Income Statement (Profit & Loss)​

Shows profitability over a period.

Formula: Revenue - Expenses = Net Income

Answers: "Did we make money?"

2. Balance Sheet​

Shows financial position at a point in time.

Formula: Assets = Liabilities + Equity

Answers: "What do we own and owe?"

3. Cash Flow Statement​

Shows cash inflows and outflows.

Categories: Operating, Investing, Financing Activities

Answers: "Where did our cash come from and go?"

Why Financial Statements Matter​

For Business Owners:

  • Measure profitability
  • Assess financial health
  • Make informed decisions
  • Track progress toward goals

For Lenders:

  • Evaluate creditworthiness
  • Assess repayment ability
  • Monitor loan covenants
  • Determine loan terms

For Investors:

  • Evaluate investment potential
  • Compare to other opportunities
  • Assess management performance
  • Value the business

For Tax Authorities:

  • Verify reported income
  • Ensure compliance
  • Assess tax liability

When to Prepare Financial Statements​

Minimum:

  • Annually (for taxes and year-end review)

Better:

  • Quarterly (for trend analysis)

Best:

  • Monthly (for proactive management)

Interrelationship of Statements​

The statements connect:

  1. Net Income from Income Statement →
  2. Increases Retained Earnings on Balance Sheet →
  3. Cash from Operations shown on Cash Flow Statement

Quality of Financial Statements​

High-quality statements:

  • Based on accurate bookkeeping
  • Prepared using consistent methods
  • Follow accounting principles (GAAP)
  • Include all material transactions
  • Properly classified accounts
  • Reconciled balances

Next Steps​

Dive deeper into each statement: