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What Accounting Reports Should You Be Looking At?

As a business owner, there are three statements that you should be looking at to assist you in analyzing your company.  They are:

  • The Income Statement– also known as the Profit and Loss Statement, Statement of Earnings, or Statement of Operations.  This is the statement that owners look at first.  The Income Statement shows activity over a period of time. This statement summarizes all of the sales activities, costs of producing or buying the products or services sold, and expenses incurred in order to run the business.  It can be very useful in giving you information regarding profitability, but can also be very dangerous in that the profit doesn’t necessarily mean you have that much money to spend.  The income statement is useful in answering the question “are we making money?” and it might help you analyze and control your expenses.  It also can be used to compare yourself to others in your industry or to your past activities.  It does not show you how much cash you put into the bank and how much improvement was made to your net worth for the year.
  • The Balance Sheet– shows information at the end of a period of time (month, quarter, year). It provides you a picture of where your business stands- how much it has in assets, how much it owes in liabilities, and how much the owners have invested in the business at a particular point in time.  The report summarizes the following:  The company’s assets, which include everything the company owns in order to stay in operation.  The company’s debt, which include any outstanding bills and loans that must be paid. The owner’s equity, which is basically how much the company owners have invested in the business.
  • The Cash Flow Statement-This is probably the most important statement for business owners and many of them have never heard of it. Cash Flow refers to generating or producing cash (cash inflows) and using or consuming cash (cash outflows).  You should think of cash flow as the lifeblood of your business, and you must keep that blood circulating at all times in order to avoid failure.  Businesses can operate a long time without profit, but they cannot survive without cash. Over all the cash flow statement shows the total change in cash and where it is from.  The Statement  is made up of three parts: Operating Cash Flows, Investing Cash Flows, and Financing cash flows.  Operating cash flow is just what it says, it shows you cash generated from operating your business. It is used as a measure to test the quality of the company’s profit. Investing cash flow shows us cash from outside investments or from the sale of assets or cash used to purchase assets.  Financing cash flow shows the cash provided from loans and the amount used to repay them.

All three of these statements are important, each shows something different, and understanding how they tie together can unlock many mysteries about your company. Additionally, there are important differences between cash basis financial reports and accrual basis financial reports that will be discussed in a future post.

If you have any questions regarding how to read and understand your financial statements, please let us know.

Business Accounting