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Understanding Financial Statements: Overview

There are a few basic reports that encompass what are known as financial statements.  The purpose of these documents is to outline the current financial state of an organization for the review of the owners, shareholders, and any other party that may have an interest in the well-being of the company.  These statements typically include the balance sheet, the income statement, and cash flow statement.  Analysis of these reports helps in making educated decisions for the business.

The balance sheet is a snapshot of the overall financial health of the company at a specific time.  This includes assets, liabilities, and ownership equity.  For a short-term understanding of the business’s financial position, the cash flow statement is used.  Generally, it gives an analysis on the company’s ability to pay bills.  The income statement, also known as the profit and loss statement, shows money received for goods or services sold (revenue) and subtracts the expenses to result in the net income, or bottom line.

Understanding the purposes of these basic financial statements removes the uncertainty from the money side of operating a business.  Depending on the size of the company, they may also be reviewed by employees and shareholders.  Each of these statements will be discussed in more detail in the coming days.