There are several important financial statements that all companies offer. These documents include the Net Income Statement, the Cash Flow Statement, and the Comprehensive Income Statement. What do they disclose and which ones are crucial?
A company’s net income statement is really the company’s total earnings and its net income. Of course, the net earnings figure has to take into account a number of factors including company expenses, taxes, and depreciation. But it is an important document because it gives an indication of just how profitable the company is.
Another important and revealing document is the cash flow statement. A cash flow statement is usually less inclusive because it focuses on and only deals with money inflows and outflows that are the result of core company business operations. The cash inflows are a reflection of the money generated by the sales of the company’s products or services. Changes in cash flow are normally reflected in the company’s accounts receivable, depreciation, inventory, and accounts payable all of which are lumped into the company’s operations.
The company’s flow of money is usually calculated after making certain adjustments to the net income by either adding or subtracting differences in the total of all revenue, expenses, and credit transactions from one period to the next. These adjustments must be made because non-cash items are calculated into net income (the income statement) and the total assets and liabilities of the company (the balance Sheet). Because not all business activities don’t always include cash transactions, many of these activities have to be re-examined when you are attempting to calculate a company’s cash flow from its operations.
As an example of this, depreciation is not really a cash expense. In reality, it is a set amount of money that is deducted from the total real value of a company asset that has previous been accounted for, This is exactly why it is added back into the net sales number for calculating the company’s cash flow. The only time that income from an asset is accounted for is when that particular company asset is sold.
The most crucial and extensive document that a company produces is the comprehensive income statement. It’s crucial because it provides an interested party with a complete overview of the company’s sales and expenses. These numbers include the cost of goods, total expenses, taxes and even interest payments. At the very end of the income statement, you will usually find the company’s net income or earnings. However, an important point to remember is that the net income listed on the statement is not necessarily all inclusive. What the net income figure reveals is only that income that is derived from the company’s day to day business operations. There are other instances, however, when a company can make or lose money from the change in the value of its assets that aren’t reflected here. This number is usually a part of the company’s cash flow statement. This number, however, is always included when the company produces an all inclusive income statement.
A company’s all inclusive or comprehensive income is the sum of all income and expenses that occur during a specified time period. Generally, all inclusive income is prepared as a financial statement that includes revenues (money coming in) finance costs, tax expenses (money paid to agencies of the state city or Federal governments) profit sharing costs and losses, and discontinued operations. Discontinued operations occur when a certain product line of a business is sold or abandoned and is generally listed separately on an income statement. It is done this way so that so that company investors are less likely to be misled that it is also a part of the company’s profit.
From a general accounting standpoint, there are several acceptable ways to construct a financial statement. In many instances, though, these other methods could be viewed as lacking specific details, narrow, and even being limited in their scope.
It would be preferable when looking at a company and considering it as either an investment or as a purchase to actually get a copy of all their financials including all the documents we covered in this article.