Prepare basic financial statements (balance sheet, income statement, and

statement of cash flow)

Financial statements in financial document used to indicate the financial position of a business at
particular moment of time. The statement is prepared at the end of each financial year using
accounting basis

Several management experts have emphasized that Understanding financial statements is

1. Profit and loss account / Income statement

2. Statement of retained earnings / changes in equity

3. Balance sheet

4. Cash flow statement

Financial Statement Reports

The profit and loss account include thorough details of the company's revenues, expenses and tax
costs, which are used to generate an overall profit figure for the company. As such, it includes
information from all revenue and expense accounts, as well as any capital gains or losses made
over the accounting period and any adjusting entries.

The statement of retained earnings reveals the profits earned by the company, or losses made, have
been retained in the company as shareholder's equity. Companies can boost the value of their
shareholder's equity through making profits. The retained earnings are made up of the company's
net profits, less any earnings distributed to shareholders in the form of dividends. Consequently,
in order to prepare the statement of retained earnings company's simply take their previous level
of retained earnings, add their net revenue and subtract any dividends paid out and the value of
any share repurchases.

The balance sheet is important part of financial statement. It gives clear picture of the company's
assets, liabilities and shareholders' equity, as per the accounting equation. As such, it is prepared
by adding the balance of all asset accounts to create the total assets figure, adding all liability
accounts to create the total liabilities figure, then adding the capital stock balance and the retained
earnings balance to create the total shareholders' equity figure. The total assets figure should be
equal to the sum of the total liabilities and the total shareholders' equity, according to the
accounting equation.

A balance sheet is an extended form of the accounting equation. An accounting equation is:

Assets = Liabilities + Equity

The balance sheet, also known as the statement of financial position, is financial statement
prepared during the accounting cycle. The balance sheet reports a company's financial status based
on its assets, liabilities, and equity at a single moment in time. It is dissimilar to the income
statement and does not report activities over a huge time frame. The balance sheet is essentially a
representation a company's recourses, debts, and ownership on a given day. In this way, the balance
sheet is sometimes considered less trustworthy of a company's present financial performance.
Annual income statements look at performance over the course of 12 months, whereas, the balance
sheet only concentrates on the financial position of one day. The balance sheet is essentially a
report version of the accounting equation and also termed as the balance sheet equation where
assets always equate liabilities plus shareholder's equity. In this manner, the balance sheet
demonstrates how the resources controlled by the business (assets) are financed by debt (liabilities)
or shareholder investments (equity). Shareholders and creditors generally visualize the statement
of financial position for awareness as to how efficiently a company can utilize its resources and
how successfully it can finance them.
This statement can be reported in two different formats that include account form and report form.
The account form comprises of two columns that show assets on the left column of the report and
liabilities and equity on the right column. The debit accounts are presented on the left and credit
accounts are on the right. The report form only has one column. This form is considered as a
traditional report that is issued by companies. Assets are always present first followed by liabilities
and equity. In both formats, assets are classified into current and long-term assets. Current assets
include resources that will be used in the current year, whereas long-term assets are resources
lasting longer than one year. Liabilities are also separated into current and long-term categories.
Like all financial statements, the balance sheet has a headline that display's the company name,
title of the statement and the time period of the report.

The cash flow statement is exclusive amongst the financial statements, in that it does not actually
reveal any change in the value of the company. Instead, it simply gives details about changes have
occurred to the company's cash balance over the years. However, as most companies go bankrupt
due to a lack of cash flow to pay expenses and debts, the cash flow statement has distinct role in
accounting arena.

The cash flow statement is solely based on the cash held by the company. It cannot be produced
from the ledger accounts, as these will include accruals and deferrals. Consequently, it must be
derived from available information in one of two ways. The company can either use its net income
figure, adding or subtracting noncash items from it, or the company can just generate a cash flow
statement from all its cash receipts and payments.

Financial Statement Analysis: Though Business possessors are not in need of all the details, but
they certainly want to understand the huge part of their current financial position and cash position.
These insights are critical to make important decisions to operate business.

Preparation

Financial statements preparation can be effortless or it may be intricate. It totally depends on the
size of the company. Some statements need footnote disclosures while other can be presented
without any. Particulars like this generally depend on the intention of the financial statements.
Financial statements are prepared by transferring the account balances on the adjusted trial balance
to a set of financial statement templates.

To summarize, financial statements are reports prepared and issued by corporations to provide
valuable financial information to investors and creditors about a company's performance and
financial standings. The primary purpose of financial accounting is to provide useful financial
information to users outside of the company.

NB

Regardless of whether you personally participate in the process, understanding how to produce a
basic financial statement and report is essential for every small-business owner. A balance sheet,
income statement and cash flow analysis are, according to the U.S. Small Business Administration,
the most important for a small-business owner to know. Producing these documents doesn’t
require an accounting degree, and a variety of tools can help make steps in creating these
documents significantly easier.

Financial statements and reports must be produced in a specific order. This is because the balance
sheet uses information from the general ledger, the income statement uses information from the
balance sheet, and a cash flow analysis uses information from both. If your business uses an
electronic accounting software program, financial statements and reports can be produced
automatically. If not, statement and report preparation can be made easier -- and often more
accurate -- by entering financial data into a spreadsheet or modifiable template. Another option is
to use the American Institute of CPA’s Financial Reporting Toolkit to create basic financial
statements.

Preparing a Balance Sheet

A balance sheet is vital to assessing the financial health of your business at a specific point in time.
Its structure is identical to the accounting equation, with assets most often listed on the left, and
liabilities and owner’s equity listed in separate sections on the right. The asset section lists assets
in descending order according to how easily they can be converted into cash. Current assets,
including cash, accounts receivable and inventory, come first, followed by noncurrent assets such
as fixed assets and intangibles. Total Assets represent the sum of all the business’s cash or cash
equivalent assets. Liabilities are divided into two sections and listed according to their due dates.
Current liabilities are those coming due within the current year and long-term liabilities are debts
and other financial obligations due in future years. Owner’s equity is calculated by subtracting
total liabilities from total assets.

Preparing an Income Statement

Preparing an income statement starts by listing gross sales revenues for the accounting period.
Deductions for sales returns and discount allowances are then subtracted from gross sales to arrive
at total net sales. Inventory expenses, including an opening inventory valuation, delivery charges,
and monthly inventory purchases are totaled and subtracted from total net sales to calculate gross
profit for the reporting period. Daily operating expenses are listed on a separate sheet, with the
total entered on the income statement, and, along with depreciation, are subtracted from gross
profit to determine the business’s total income from operations. Interest information, including
interest income the business receives and interest expenses the business pays, are totaled and
entered -- either by subtracting or adding, depending on the result -- to arrive at the business’s
operating profit before income tax. As a final step, income tax is deducted and you arrive at a net
profit or net loss.

Preparing a Cash Flow Report

A cash flow report is vital for determining whether your business has enough liquid assets to pay
its daily operating expenses and short-term debt obligations. It differs from an income statement
in that rather than focusing on profit or loss, a cash flow report focuses on cash generation and
cash outflows. It is important for assessing how your business generates cash. Start by listing cash-
on-hand available at the beginning of the month. Add to this amount any cash you expect to
generate in the coming month. Include incoming revenue from sales revenues, accounts
receivables collections, short-or-long-term loans, or money you personally invest. Next, subtract
any payments you expect to make during the coming month. This includes both fixed and variable
costs such as rent, tax and loan payments, and the cost of goods sold. Subtract your total monthly
payments from total monthly revenue generation to determine whether cash inflows are sufficient
or whether you’re relying too heavily on factors other than sales revenues to keep your business
running.