Finance
Basics: 3 Basic Financial Statement
(B)
by
Laurus Nobilis
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What
are 3 Basic Financial Statements? What is the
connection between Balance Sheet, Cash Flow
Statement and Profit & Loss Statement?
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| Back |
Posted
Apr 2009 |
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There are 3 basic
finance documents that describe the financial traffic of
the company:
- Balance
Sheet
- Profit
& Loss statement
- Cash
Flow statement
THE
FINANCIAL TRIANGLE
Like
the three angles of a triangle, the three basic
financial statements are integrally linked to each
other.
If
you change any item in one of the financial statements,
one or both of the remaining statements must change as
well.
THE
BALANCE SHEET
A
Balance Sheet provides a snapshot of a company's
situation at a particular point in time.
The
'snapshot' may be taken:
•
at the end of the year (or financial year),
•
at the end of every quarter,
•
each month
•
at any other given moment.
It
is useful to compare two balance sheets to see the
changes between them.
Assets
( left side of the Balance Sheet )
•
what a company owns, eg. equipment, cash, money due from
customers, inventories.
•
represent the company's use of funds, ie. what it has
done with the money it has received.
Liabilities
( right side of the Balance Sheet )
•
what the company owes, eg. to the shareholders, to the
bank and to suppliers.
•
show the company's sources of funds, ie. where the money
for the business has come from
PROFIT
& LOSS STATEMENT
Shows
the results achieved by a company over a period
of time.
The
Profit & Loss Statement answers the question:
"Did
the company make or lose money during this period?"
CASH
FLOW STATEMENT
Records
the movement of money.
It
shows the money coming into and going out of
a company during the period between two balance sheets
A
BIG PICTURE
A
full picture of a company's finances can only be gained
from comparing at least two balance sheets and what has
happened during the time in between them.
Together,
the three statements provide information about a
company, each from a different viewpoint.
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