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Financial Statements

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Financial Statements and Reports

Financial management, budgeting, forecasting and reporting presents a formidable challenge to most small business owners. Financial management is often seen as burdensome and time consuming but never the less cannot be neglected. Businesses that are able to grasp the importance of accurate financial management are rewarded with more accurate budgeting, forecasting and timely decision-making. A disciplined financial management culture will deliver a true competitive advantage. (Adaptive Planning, 2005) Understanding the many types of financial statements and reports is the first step in achieving sound financial management.

Financial statements and managerial reports come in many different forms but can be categorized into one of three required financial statements. The types include the income statement, balance sheet and the statement of cash flows. “The income statement is the major device for measuring the profitability of a firm over a period of time.”(Block & Hirt, 2005) Income statement are normally presented in a way that profit or loss can easily be examined. The income statement will show company growth or depreciation over a specified period of time. “A limitation of the income statement is that it reports income and expense primarily on a transaction basis and thus may not recognize certain major economic events as they occur.”(Block & Hirt, 2005) “The balance sheet indicates what the firm owns and how these assets are financed in the form of liabilities or ownership interest.”(Block & Hirt, 2005) The balance sheet is similar to the income statement; however, the balance sheet provides a snap shot of where the business is at a specific point in time. In other words, what is the financial status of the business today? “Because the balance sheet is presented on a historical cost basis, it may not always reflect the true value of the firm.”(Block & Hirt, 2005) The Income statement and the Balance Sheet are intended to answer two questions: How much did the firm make or lose and what is the firm worth. (Block & Hirt, 2005) The balance sheet is broken down into several areas addressing business assets, investments, plant equipment and liabilities and stockholder equity. (Block & Hirt, 2005) “The purpose of the Statement of Cash Flows is to emphasize the critical nature of cash flow to the operations of the firm.”(Block & Hirt, 2005) Cash flow refers to actual cash or items that can be converted to cash quickly. Unlike the income statement and the balance sheet in which revenues and expenses are recognized as they occur, the cash flow statement actually shows when money changes hands. (Block & Hirt, 2005) The statement of cash flow translates income statement and balance sheet data into cash flow information. Accurate cash flow data allows the business to better assess its ability to pay cash dividends, invest in new equipment and continue to grow. (Block & Hirt, 2005) Sound accurate financial statements are key to making informed, ethical business decisions.

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