Income and expense statements are crucial financial documents that summarize a company’s revenues and costs, aiding in the evaluation of financial performance and strategic decision-making. Learn their definitions, differences, examples, and importance for businesses.
What are the income and expense statements?
Income and expense statements, or profit and loss statements, summarize a company’s revenues and costs over a specific period. They help evaluate financial performance by calculating net income or loss, and guiding strategic decisions for improved profitability and operational efficiency while serving stakeholders, management, and investors.
Meaning
Income and expense statements, commonly known as profit and loss statements, are crucial financial documents that summarize a company’s revenues, costs, and expenses over a specific period. They play an essential role in evaluating the financial performance of a business, offering stakeholders a clear view of how well the organization is generating profit compared to its expenses. By analyzing these statements, business owners and managers can make strategic decisions to improve profitability and operational efficiency.
Definition
An income statement is a formal financial report that illustrates a company’s revenues and expenses during a determined timeframe—this could be quarterly, annually, or for a specific project. The primary purpose of the income statement is to depict the company’s profitability by calculating the net income or loss, which determined by subtracting total expenses from total revenues. It serves as a vital tool for business owners, investors, financial analysts, and creditors to assess the profitability, operational efficiency, and future viability of the company.
Comparison Table of the Differences Between Income and Expense Statements
Feature
Income Statement
Expense Statement
Purpose
To show profitability
To detail costs and spending
Focus
Revenues and profits
Costs and expenses
Format
Revenues – Expenses = Net Profit
List of all expenses incurred
Timeframe
Typically covers a specific period
Can be prepared for various periods
Audience
Management, investors, stakeholders
Management for budgeting and planning
Analysis
Indicates financial performance
Helps in cost management and reduction
Relevance
Critical for stakeholder investment
Also, Useful for internal budgeting decisions
Key Differences Between Income and Expense Statements
Purpose: The income statement’s primary goal is to illustrate the profitability of a business over a specified period. In contrast, an expense statement focused on detailing the specific costs incurred, providing a clearer picture of where the business is spending its resources.
Components: An income statement typically includes several key components: total revenue generated, cost of goods sold (COGS), gross profit (the difference between revenues and COGS), operating expenses (fixed and variable costs), and net income, which is the final profit figure after all costs have been deducted. Conversely, an expense statement will list out various categories of expenses, such as rent, salaries, utility bills, and marketing costs, often without detailing revenues.
Usage: Income statements are often used to attract potential investors, assess the financial performance of a business, and prepare for audits. On the other hand, expense statements are more often utilized internally by management for budgeting, forecasting, and monitoring expenditures to maintain efficient operations.
Examples
Example of an Income Statement
Income Statement
Revenue
$100,000
Cost of Goods Sold
$60,000
Gross Profit
$40,000
Operating Expenses
$20,000
Net Income
$20,000
In this example, the income statement exhibits total revenues of $100,000. After deducting the cost of goods sold (COGS) of $60,000, the gross profit stands at $40,000. Following that, the operating expenses amount to $20,000, leading to a net income of $20,000. This indicates that the company generated a profit after all expenses have been accounted for within the given timeframe.
Example of an Expense Statement
Expense Statement
Rent
$2,000
Salaries
$8,000
Utilities
$500
Marketing
$1,500
Total Expenses
$12,000
In this expense statement example, various costs are recorded, including rent, salaries, utilities, and marketing, with a total expense figure of $12,000. Also, This document allows management to see how much is being spent in different categories and can serve as a basis for budget adjustments and financial planning going forward.
These statements are essential tools for any business, enabling stakeholders to make informed decisions based on the company’s financial dynamics, and enhancing the strategic operational framework to ensure long-term success.
FAQs
What is an income statement?
An income statement, also known as a profit and loss statement, summarizes a company’s revenues and expenses over a specific period, helping to determine net income or loss.
Why are income and expense statements important?
These statements are crucial for evaluating financial performance, guiding strategic decisions, attracting investors, and maintaining operational efficiency within a business.
How often should income statements be prepared?
Income statements can be prepared quarterly, annually, or for specific projects, depending on the needs of the business and stakeholders.
What is the difference between an income statement and an expense statement?
An income statement shows profitability by comparing total revenues to total expenses, while an expense statement focuses solely on detailing the costs incurred by the business.
Who uses income and expense statements?
Management, investors, financial analysts, and creditors use these statements to assess a company’s profitability, operational efficiency, and future viability.
Can an expense statement impact budgeting decisions?
Yes, expense statements provide critical insights into spending patterns, helping management make informed budgeting and financial planning decisions.
How do you calculate net income from an income statement?
Net income is calculated by subtracting total expenses from total revenues. It reflects the profit or loss made during the specified period.
What components are typically included in an income statement?
Common components include total revenue, cost of goods sold (COGS), gross profit, operating expenses, and net income.
Are income and expense statements legally required?
While not always legally required, these statements are vital for internal management, attracting investors, and preparing for audits, making them important for most businesses.
The Balance Sheet v Profit and Loss Statement serve vital roles in financial reporting. This article explores their meanings, definitions, key differences, examples, and frequently asked questions, providing a comprehensive overview for understanding a company’s financial health.
1. Meaning of Balance Sheet vs. Profit and Loss Statement
Balance Sheet: A financial statement that provides a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
Profit and Loss Statement (P&L): Also known as an income statement, it summarizes the revenues, costs, and expenses incurred during a specific period, showing the company’s profitability.
2. Definition of Balance Sheet vs. Profit and Loss Statement
Balance Sheet: A document that reflects the financial position of a business, detailing what it owns (assets), what it owes (liabilities), and the residual interest of its owners (equity).
Profit and Loss Statement: A report that outlines the revenues generated and expenses incurred over a set period, ultimately determining the net profit or loss during that time.
3. Comparison Table of the Differences Between Balance Sheet v Profit and Loss Statement
4. Key Differences Between Balance Sheet v Profit and Loss Statement
Timing: The balance sheet is a snapshot of a specific date, while the P&L statement covers a range of dates.
Focus: The balance sheet focuses on what the company owns and owes, whereas the P&L statement emphasizes income and expenses.
Frequency: Balance sheets are typically prepared quarterly or annually, while P&L statements can be prepared monthly, quarterly, or annually.
Nature of Information: The balance sheet provides static information about the company’s financial position, while the P&L gives dynamic information about its operations over time.
5. Examples of Balance Sheet v Profit and Loss Statement
Equity - Common Stock: $10,000 - Retained Earnings: $15,000 - Total Equity: $25,000
Profit and Loss Statement Example:
ABC Company Profit and Loss Statement For the Year Ended December 31, 2023
Revenues - Sales Revenue: $200,000
Expenses - Cost of Goods Sold: $80,000 - Selling Expenses: $30,000 - Administrative Expenses: $20,000 - Total Expenses: $130,000
Net Profit: $70,000
Frequently Asked Questions (FAQs)
1. What is the main purpose of a Balance Sheet?
The main purpose of a Balance Sheet is to provide a snapshot of a company’s financial position at a specific point in time, detailing its assets, liabilities, and shareholders’ equity.
2. How often should a Profit and Loss Statement be created?
A Profit and Loss Statement can be prepared on a monthly, quarterly, or annual basis, depending on the company’s reporting requirements and financial management practices.
3. What information does a Balance Sheet provide?
A Balance Sheet provides information about what a company owns (assets), what it owes (liabilities), and the residual interest of its owners (equity) at a particular date.
4. How do the Balance Sheet and Profit and Loss Statement complement each other?
The Balance Sheet provides a financial snapshot of a company’s assets and liabilities at a point in time, while the Profit and Loss Statement indicates how much money the company made or lost over a period. Together, they provide a comprehensive view of financial health.
5. Can a company be profitable but still have a negative Balance Sheet?
Yes, a company can be profitable in terms of its Profit and Loss Statement while having a negative Balance Sheet if it has high liabilities compared to its assets or if it has been accumulating losses over time.
6. What does the formula Assets = Liabilities + Equity signify?
This formula signifies that all assets owned by a company are financed either by borrowing money (liabilities) or by the owners (equity). It illustrates the fundamental accounting equation that forms the basis of double-entry bookkeeping.
7. Why is it important to regularly update these financial statements?
Regular updates of both the Balance Sheet and Profit and Loss Statement are important for maintaining accurate records, making informed business decisions, and providing transparency to stakeholders, such as investors and creditors.
Financial analysis refers to an assessment of the viability, stability, and profitability of a business, sub-business, or project. What is Financial Analysis? Meaning, Objectives, and Types. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports.
Explanation of each of the Content, What is Financial Analysis? Meaning, Objectives, Types, and Tools.
Financial analysis is the evaluation of a business to determine its profitability, liabilities, strengths, and future earnings potential. A wide variety of techniques may be utilized to assess an organization’s financial viability including the most common methodologies of horizontal analysis, vertical analysis, and ratio analysis. Impact of Big Data Analysis on CPA Audit.
Most analytical methods involve the company’s financial statements, internal or external audits, and investigations. Also, Financial analysis is a critical aspect of all commercial activity. As it provides actionable insights into the organization’s health and future potential. Not only does this information provide investors and lenders with critical data that may affect the price of stocks or interest rates. But these reports also allow company managers to gauge their performance on expectations or industry growth. From a management point of view, financial analyses are critical to the success of the company. Because they highlight weaknesses and strengths that directly affect competitiveness. Don’t forget to read the Cost of Capital.
Meaning of Financial analysis:
An analysis of financial statements is the process of critically examining in detail accounting information given in the financial statements. For analysis, individual items are studied, and their interrelationships with other related figures are established. The data is sometimes rearranged to have a better understanding of the information with the help of different techniques or tools for the purpose. Analyzing financial statements is a process of evaluating the relationship between parts of financial statements to obtain a better understanding of the firm’s position and performance.
The analysis of financial statements thus refers to the treatment of the information contained in the financial statements in a way to afford a full diagnosis of the profitability and financial position of the firm concerned. For this purpose financial statements are classified methodically, analyzed, and compared with the figures of previous years or other similar firms. The term ‘Analysis’ and ‘interpretation’ are closely related, but a distinction can be made between the two. Analysis means evaluating the relationship between the components of financial statements to understand the firm’s performance in a better way.
Various account balances appear in the financial statements. These account balances do not represent homogeneous data so it is difficult to interpret them and draw some conclusions. This requires an analysis of the data in the financial statements to bring some homogeneity to the figures shown in the financial statements. Interpretation is thus drawing inferences and stating what the figures in the financial statements mean. Interpretation is dependent on the interpreter himself. The interpreter must have experience, understanding, and intelligence to draw correct conclusions from the analyzed data.
Objectives of Financial analysis:
Analysis of financial statements is made to assess the financial position and profitability of a concern. Analysis can be made through accounting ratios, fitting trend lines, common size statements, etc. Accounting ratios calculated for many years show the trend of the change of position, i.e., whether the trend is upward or downward, or static. The ascertainment of the trend helps us in making estimates for the future. Keeping in view the importance of accounting ratios the accountant should calculate the ratios in the appropriate forum. As early as possible, for presentation to management for managerial control.
The main objectives of the analysis of financial statements are :
to assess the profitability of the concern;
to examine the operational efficiency of the concern as a whole and its various parts or departments;
to measure the short-term and long-term solvency of the concern for the benefit of the debenture holders and trade creditors;
to undertake a comparative study with one firm with another firm or one department with another department; and
to assess the financial stability of a business concern.
The different users and decision makers to achieve the following objectives:
Assessment of Past Performance and Current Position:
Past performance is often a good indicator of future performance. Therefore, an investor or creditor is interested in the trend of past sales, expenses, net income, cash flow, and return on investment. These trends offer a means for judging management’s past performance and are possible indicators of future performance. Similarly, the analysis of the current position indicates where the business stands today.
For instance, the current position analysis will show the types of assets owned by a business enterprise and the different liabilities due to the enterprise. It will tell what the cash position is and how much debt the company has to equity. And how reasonable the inventories and receivables are.
Prediction of Net Income and Growth Prospects:
The financial statement analysis helps in predicting the earning prospects and growth rates in the earnings. Which are used by investors while comparing investment alternatives. And other users are interested in judging the earning potential of business enterprises.
Investors also consider the risk or uncertainty associated with the expected return. The decision-makers are futuristic and are always concerned with the future. Financial statements which contain information on past performances are analyzed and interpreted. As a basis for forecasting future rates of return and for assessing risk.
Prediction of Bankruptcy and Failure:
Financial statement analysis is a significant tool in predicting the bankruptcy and failure probability of business enterprises. After being aware of the probable failure, both managers and investors can take preventive measures to avoid/minimize losses. Corporate management can effect changes in operating policy, reorganize financial structure or even go for voluntary liquidation to shorten the length of time losses. In the accounting and finance area, empirical studies conducted have suggested a set of financial ratios which can give the early signal of corporate failure.
Such a prediction model based on financial statement analysis is useful to managers, investors, and creditors. Managers may use the ratios prediction model to assess the solvency position of their firms and thus can take appropriate corrective actions. Investors and shareholders can use the model to make the optimum portfolio selection and to bring changes in the investment strategy to their investment goals. Similarly, creditors can apply the prediction model while evaluating the creditworthiness of business enterprises.
Loan Decision by Financial Institutions and Banks:
Financial statement analysis stands used by financial institutions, loaning agencies, banks, and others to make sound loan or credit decisions. In this way, they can make the proper allocation of credit among the different borrowers.
Financial statement analysis helps in determining credit risk, deciding the terms and conditions of the loan if sanctioned, interest rate, maturity date, etc.
Tools of Financial Analysis:
Financial Analysts can use a variety of tools for analysis and interpretation of financial statements particularly to suit the requirements of the specific enterprise. Explanations of the Tools of Financial Analysis,The principal tools are as under:
Note: Tools of Financial Analysis – the tool of contents explanation later in these articles.
Types of Financial Analysis:
There is a myriad of techniques that can be used to analyze the performance of a commercial enterprise. But the most common methods use the following strategies:
Horizontal Analysis:
This method uses past performance as a baseline metric for the success of the company. There are variations in this method that may use some number of years as a standard. For example, if the company has been in existence for some time, the two years prior may use as a comparison. If the company is relatively new, it is common to use the initial year as a baseline and plot performance to it.
Vertical Analysis:
Also known as component percentages, this type of analysis compares the profits to assets, liabilities, and equities. This method is generally helpful when comparing a large number of similar companies. The limitation of this method is that it often does not weigh factors that impact future viability appropriately, like long-term partnerships, and one-time losses or investments.
Ratio Analysis:
This method analyzes various aspects of the company’s financial health. For example, a current ratio is the comparison of assets to liabilities. This type of analysis is extremely popular due to the analyst’s ability to choose two key features of businesses to analyze. Many analysts utilize this type of analysis to support their evaluations of organizations even if conventional analytical methodologies may not be as positive. The weakness in this type of analysis is that if the two characteristics stand poorly chosen, an unreliable estimation of financial viability may produce.
Stock Price Movement:
This technique relies on analyzing the performance of the company’s stock rather than its financial health. In essence, this method uses the financial markets as an analytical tool. Various methods may use to evaluate the stock’s performance including enlarging or narrowing the window of evaluation, comparison to similar companies, and trend analysis. There are some serious drawbacks to this technique. If the markets are relying on inaccurate data or analytical methodologies, they may be pricing stocks higher than their actual value. Stock analyses often ignore the company’s intrinsic sustainability to profit from stock price fluctuations and are unreliable foundations for establishing long-term investment relationships.
Financial analysis is the examination of financial information to reach business decisions. This analysis typically results in the reallocation of resources to or from a business or a specific internal operation. This type of analysis applies particularly well to the following situations:
Investment decisions by the external investor:
In this situation, a financial analyst or investor reviews the financial statements and accompanying disclosures of a company to see if it is worthwhile to invest in or lend money to the entity. This typically involves ratio analysis to see if the organization is sufficiently liquid and generates a sufficient amount of cash flow. It may also involve combining the information in the financial statements for multiple periods to derive trend lines that can use to extrapolate financial results into the future.
Investment decisions by the internal investor:
In this situation, an internal analyst reviews the projected cash flows and other information related to a prospective investment (usually for a fixed asset). The intent is to see if the expected cash outflows from the project will generate a sufficient return on investment. This examination can also focus on whether to rent, lease, or purchase an asset.
What is Financial Analysis? Meaning, Objectives, and Types. Image Credit from @Pixabay.
Financial analysis tools can elaborately stand defined as an assessment of, how effective the investments or funds engage by the organization or business.
In this article, we will discuss the six important tools of financial analysis. Explanations of the Tools of Financial Analysis.
To check the efficiency of funds used for operations, and lastly to secure debtors and claims against the business’s assets. Tools of Financial Analysis: Financial Analysts can use a variety of tools for the analysis and interpretation of financial statements particularly to suit the requirements of the specific enterprise. The principal tools are as under:
Comparative financial statements are those statements that have stood designed in a way to provide time perspective to the consideration of various elements of financial position embodied in such statements. In these statements, figures for two or more periods exist placed side by side to facilitate comparison. Both the Income Statement and Balance Sheet can prepare in the form of Comparative Financial Statements.
Comparative Income Statement
The comparative Income Statement is the study of the trend of the same items/group of items in two or more Income Statements of the firm for different periods. The changes in the Income Statement items over the period would help in forming an opinion about the performance of the enterprise in its business operations. The Interpretation of the Comparative Income Statement would be as follows:
The changes in sales should compare with the changes in the cost of goods sold. If the increase in sales is more than the increase in the cost of goods sold. Then the profitability will improve.
An increase in operating expenses or a decrease in sales would imply a decrease in operating profit. And a decrease in operating expenses or increase in sales would imply an increase in operating profit.
The increase or decrease in net profit will give an idea of the overall profitability of the concern.
Comparative Balance Sheet
The comparative Balance Sheet analysis would highlight the trend of various items and groups of items appearing in two or more Balance Sheets of a firm on different dates. The changes in periodic balance sheet items would reflect the changes in the financial position at two or more periods. The Interpretation of Comparative Balance Sheets is as follows:
The increase in working capital would imply an increase in the liquidity position of the firm over the period. And the decrease in working capital would imply a deterioration in the liquidity position of the firm.
An assessment of the long-term financial position can stand made by studying the changes in fixed assets, capital, and long-term liabilities. If the increase in capital and long-term liabilities is more than the increase in fixed assets. It implies that a part of the capital and long-term liabilities has stood used for financing a part of working capital as well. This will be a reflection of the good fiscal policy. The reverse situation will be a signal toward an increasing degree of risk to which the long-term solvency of the concern would expose to.
The changes in retained earnings, reserves, and surpluses will indicate the trend in the profitability of the concern. An increase in reserve and surplus and the Profit and Loss Account is an indication of improvement in profitability of the concern. The decrease in these accounts may imply the payment of dividends, issue of bonus shares, or deterioration in the profitability of the concern.
Common-size Financial Statements:
Common-size Financial Statements are those in which figures reported stand converted into percentages to some common base. In the Income Statement, the sale figure assumes to be 100 and all figures stand expressed as a percentage of sales. Similarly, in the Balance sheet, the total of assets or liabilities stands taken as 100 and all the figures stand expressed as a percentage of this total.
Common Size Income Statement
In the case of the Income Statement, the sales figure assume to be equal to 100. And all other statistics stand expressed as the percentage of sales. The relationship between items on the Income Statement and the volume of sales is quite significant. Since it would help evaluate the operational activities of the concern. The selling expenses will certainly go up with the increase in sales. The administrative and financial expenses may go up or may remain at the same level. In case of a decline in sales, selling expenses should decrease.
Common Size Balance Sheet
For a common-size Balance Sheet, the total of assets or liabilities takes 100. And all the figures are expressed as a percentage of the total. In other words, each asset stands expressed as the percentage of total assets/liabilities. And each liability exists expressed as the percentage of total assets/liabilities. This statement will throw light on the solvency position of the concern by providing an analysis of the pattern of financing both long-term and working capital needs of the concern.
Trend Analysis
The third tool of financial analysis is trend analysis. This is immensely helpful in making a comparative study of the financial statements for several years. Under this method, trend percentages calculate for each item of the financial statement taking the figure of the base year as 100. The starting year stands usually taken as the base year. The trend percentages show the relationship of each item with its preceding year’s percentages.
These percentages can also be present in the form of index numbers showing the relative changes in the financial data of a certain period. This will exhibit the direction, (i.e., upward or downward trend) to which the concern is proceeding. These trend ratios may compare with industry ratios to know the strong or weak points of concern. These stand calculated only for major items instead of calculating for all items in the financial statements.
While calculating trend percentages, the following precautions may be taken:
The accounting principles and practices must follow constantly over the period for which the analysis make. This is necessary to maintain consistency and comparability.
The base year selected should be a normal and representative year.
Trend percentages should calculate only for those items which have a logical relationship with one another.
Trend percentages should also be carefully studied after considering the absolute figures on which these are based. Otherwise, they may give misleading conclusions.
To make the comparison meaningful, trend percentages of the current year should adjust in light of price level changes as compared to the base year.
Cash Flow Statement
A cash flow statement shows an entity’s cash receipts classified by major sources. And its cash payments classified by major uses during a period. It provides useful information about an entity’s activities in generating cash from operations to repay debt, distribute dividends or reinvest to maintain or expand its operating capacity. About its financing activities, both debt and equity; and about its investment in fixed assets or current assets other than cash.
In other words, a cash flow statement lists down various items and their respective magnitude. Which brings about changes in the cash balance between two balance sheet dates. All the items whether current or non-current that increase or decrease the balance of cash are included in the cash flow statement. Therefore, the effect of changes in the current assets and current liabilities during an accounting period in cash position. Which do not shown in a fund flow statement depicted in a cash flow statement.
The depiction of all possible sources and application of cash in the cash flow statement helps the financial manager in short-term financial planning in a significant manner because the short-term business obligations such as trade creditors, bank loans, interest on debentures, and dividends to shareholders can be met out of cash only. The preparation of the cash flow statement is also consistent with the basic objective of financial reporting. Which is to provide information to investors, creditors, and others that would be useful in making rational decisions.
The basic objective is to enable the users of the information to predict cash flows in an organization. Since the ultimate success or failure of the business depends upon the amount of cash generated. This objective stands sought to be met by preparing a cash flow statement.
Ratio Analysis
A ratio is a simple arithmetical expression of the relationship of one number to another. According to the Accountant’s Handbook by Wixon, Kelland bedboard, “a ratio” is an expression of the quantitative relationship between two numbers”. In simple language, the ratio of one number is expressed in terms of the other and can work out by dividing one number by the other. This relationship can express as (i) percentages, say, net profits are 20 percent of sales (assuming net profits of Rs. 20,000 and sales of Rs. 1,00,000), (ii) fraction (net profit is one-fourth of sales), and (iii) proportion of numbers (the relationship between net profits and sales is 1:4). The rationale of ratio analysis lies in the fact that it makes related information comparable.
A single figure by itself has no meaning but when expressed in terms of a related figure. It yields significant inferences. Ratio analysis helps in financial forecasting, making comparisons, evaluating the solvency position of a firm, etc. For instance, the fact that the net profits of a firm amount to, say, Rs. 20 lakhs throws no light on its adequacy or otherwise. The figure for net profit has to consider other variables. How does it stand for sales? What does it represent by way of return on total assets used or total capital employed?
In case net profits
They show in terms of their relationship with items such as sales, assets, capital employed, and equity capital. And so on, meaningful conclusions can draw regarding their adequacy. Ratio analysis, thus, as a quantitative tool, enables analysts to draw quantitative answers to questions such as. Are the net profits adequate? Are the assets being used efficiently? Can the firm meet its current obligations and so on? However, ratio analysis is not an end in itself. Calculation of mere ratios does not serve any purpose unless several appropriate ratios analyze and interpret.
The following are the four steps involved in the ratio analysis:
The selection of relevant data from the financial statements depends upon the objective of the analysis.
Calculation of appropriate ratios from the above data.
Comparison of the calculated ratios with the ratios of the same firm in the past, the ratios developed from projected financial statements or the ratios of some other firms, or the comparison with ratios of the industry to which the firm belongs.
Interpretation of the ratio.
Funds Flow statements
The term ‘flow’ means movement and includes both ‘inflow’ and ‘outflow’. The term ‘flow of funds’ means the transfer of economic values from one asset or equity to another. The flow of funds stands said to have taken place when any transaction makes changes in the number of funds available before happy the transaction happens the effect of the transaction results in the increase of funds. It calls a source of funds and if it results in the decrease of funds, it knows as an application of funds.
Further, in case the transaction does not change funds, it stands said to have not resulted in the flow of funds. According to the working capital concept of funds, the term ‘flow of funds’ refers to the movement of funds in the working capital. If any transaction increases working capital. It stands said to be a source of inflow of funds and if it results in a decrease of working capital. It stands said to be an application or outflow of funds.
Explanations of the Tools of Financial Analysis Image Credit from @Pixabay.
What is the Mission Statement and Vision Statement Meaning in Business Essay? The mission reflects the exact purpose of the organization. This statement is the primary goal of the organization to reflect the company’s plans, goals, and programs. A mission statement is different from a vision statement. The vision of any organization in the future reflects a very small picture of each organization. It is usually created or set up for the organization, this is what the organization plans for the future or the future, primarily the goal of the vision is to find something.
Here are the articles to explain, the Mission Statement and Vision Statement Meaning, Benefits, Importance, and Implementation in the Business Essay!
Values are basic principles of thinking that help us understand and predict actions at the individual or group level. Each organization’s values often define and describe nature and stand behind the organization to motivate the organization on which it is built. A “code of conduct” describes the organization’s values in real pictures of how you can easily access them in a running organization.
”According to Weyerhaeuser what a vision statement means in the introduction to the company’s statement, ”our vision” and ”our values.”
An organization’s vision statement presents the upcoming or future desire which is valid and it should go on and never should be changed with each cycle of an organization.
”According to Meridian Bancorp, our vision is meridian’s statement of core values that defines the company’s culture and the meridian way of working.”
“According to Stephen Covey if you don’t set your goals based upon your Mission Statement, you may be climbing the ladder of success only to realize, when you get to the top, you’re on the wrong building”
A clear mission statement also focuses on what are the advantages which are you are offering to your patrons as well as consumers it also tells you the exact purpose of your organization.
Benefits or Importance of Mission and Vision Statement;
A good mission statement is like a born of success for the organization. It is very for the companies to find out the ways and also do the regular confirmation whether the company or organization is on the right way or not. A purpose of a clear mission statement for an organization is to align the people as well as merge all the individual’s activities into the group.
It also tells the organization’s employees whether they are doing work that is important or worthwhile. A clear statement describes the importance of work to the organization. It can change the thinking for the improvement of the organization and give the ancillary customer services to their customers. Mission has the value that it gives the change in any organization from time to time.
Normally mission statement of any organization describes the primary objectives as well as purposes. The primary function of this statement in the company is internal to evaluate the business key and company success as well as stockholders and team of leaders.
The purpose of the vision statement is to define the company’s purpose; this statement does not measure the bottom line of the company but the vision statement measures the values of the company; as well as the values that tell the company leaders how things should exist done. This statement also communicates the aims and values of the company. The vision statement gives direction to the employees that how they can provide their best and ancillary the customers.
Other Benefits or Importance;
Vision and mission statement helps the company where the company wants to go; these statements are very helpful to focus that what stands and what should exist done. A mission and vision statement gives high energy to the company to attain or set the goals; these statements require a lot of time to write, and through a mission and vision statement you can easily achieve the values.
A mission statement without a vision statement is like nothing. A mission statement defines the proper aim and activities of the company which is very important for its vision. Both statements aim to address and achieve the important and major goals of the company or organization. It is very hard without a vision and mission statement for any company to achieve its goals or aims. So these statements are the born of the companies.
Another important benefit of the mission and vision statement is also helpful to visible companies’ strategic plans, these states have all the vital mechanisms for the future propel of any company. Both statements are very helpful for guiding and communicating in the company or organization.
Mission and Vision Statement Communication & Adoption By The Staff;
The executive of any company visibly defines the mission statement to all the staff.
The seniority leaders of any company define the vision statement which is properly based on market review, the satisfaction of the consumer as well evaluate the capabilities of the company.,
The vision of the company is very simple, little, and comprehensive for all employees of the company.
The vision and mission statement undoubtedly and simply communicates to all employees about their jobs and performance.
The mission and vision statement are very helpful and guide all employees to achieve the goals.
When the senior leaders of the company change these statements they also tell to their employees how to achieve the goals and ancillary of customers.
More things;
Many companies have different channels to communicate to the employees and through these channels, they dedicate the company’s vision and mission to their employees.
In some circumstances, vision and mission statements are also communicated between employees and chief executive officers.
These statements are also very helpful to improve the staff performance as well as give training to the staff.
Many companies call the meeting to all employees and tell about the vision and mission statement.
The staff through vision and mission statement can easily understand their job and better perform.
These statements are also obliging to the promotion of the staff
Vision and mission statements are ancillary to the staff, improve the work, and are very helpful for staff.
Implementation of Mission and Vision Statement on Different Programs;
Corporate Strategy;
The corporate strategy starts through vision and Mission statement can b accessed by culture, core values, and the core values on which it competes.
The mission statement tells where the stands of the corporation are in present; and, the purpose of the vision statement is it shows where will be the corporation in the future. Does a mission statement describe what we want to do as well as who we are?
It states the capabilities, future targeted customers, and future lineup. Long-term decisions stand described in strategic visions. It tells about the corporation’s future planning i.e. the technology prospect and targeted location. To depart yourself from competitors, mission and strategies play a crucial role and define its mission for the future.
Strategic and Investment Plans;
It stands accepted worldwide vision and mission statement are very effective and vital for the strategic planning of any company.
The strategic plans and mission statement of the company to check and determine the unity themes; and also improved the response which comes from customers and shared vision; and passes this information to the company executives are responsible to implement this vision for achieving their goals.
This is very helpful to the company’s strategic vision and investment to promote the value of the company or business. Another advantage of this is very suitable for the decision-making of the company purchase; as well as this exercise you can easily implement on the new management of the company. This exercise is also ancillary to the new management and gives them time; as well as a good opportunity to understand the investment values and the cost-saving.
This will help to evaluate the company’s effectiveness and efficiency. Vision and mission statements state the company or business how you invest and after investing what you will get. This statement is also very helpful to create the plans of investment and strategy of the company. The company can achieve its goals and aims with the investment. These statements are the born of every plan. Such kinds of statements give you core ideas and the purpose of your business and company.
Tesco Example;
Now a day Tesco is going to develop economically new towns in the United Kingdom. So the vision of Tesco in investment and strategic plan is to generate new supermarkets, new housing, cycle tracks, visitor center, etc, with the help of this vision Tesco can easily achieve its goals and aims, which will increase the Tesco its profit, so vision is very helpful for investment planning and strategic planning as we saw in the Tesco vision.
Constant Change;
The constant change does not occur in the vision and mission statement for many years. It changes in such circumstances when significant change seems to be essential. The new vision and mission statements were designed by the company executives. If you are thinking to change the vision and mission statement of your company first you should have to change your planning because the vision and mission statement varies or relies on your company’s planning. The vision and mission statement arises in the meeting of management when they are discussing the strategic planning of the company.
Such sort of statements shows the whole position of the company and where the heading of the company is. Vision and mission statements also describe company matters and what the company is acting as a control center and what does not do to the company. The mission and vision of the company are constantly focused on all the managers as well as it shows the direction and holds or maintains when in some circumstances the individual objects are changed. So constant change in vision and mission statement is a bit tuff.
Example Constant Change In British Airways;
In 1997 British Airways launched a new mission statement after a brief discussion with the employees, the management of British airways replaced an existing mission statement, an existing statement which is introduced in 1995 to accumulate privatization. Many employees of the company were trained and doing their exact jobs. The new mission statement of British airways quotes the basic challenge which the company is facing. They added its new mission statement given below.
Ancillary of customers.
Consumers desires.
The climate of the global economy.
Competition challenge.
We shall say it is the change of mission, strategic plans, and vision. The purpose is to make a platform that leads to the future of the company.
The merger of vision and mission statement is very important for those large companies in which staff and managers have the right to make decisions themselves, without any permission from seniority management or the headquarters of the company. If every member of the staff knows what and where is the purpose of our company, therefore the company can easily achieve its goals and objectives.
These statements help to create the aims, goals, and targets as well as very important to constraining the company’s short-term plans and setting the budgetary trade-off to gain the company’s long terms goals.
Conclusion;
As the above discussion of vision and mission statement, I conclude that vision and mission statement is very essential for the companies, without vision and mission statement companies have not the goals if there is no goal, how companies can survive or formulate. As we saw vision and mission statement is a born from every planning and strategy of the company. These statements also motivate the staff and guide them about their jobs. However, we can say that vision and mission statement are the base of the companies. Such kind of statements is very important and very helpful to evaluate the companies or organizational values. However, we can judge that without a mission and vision statement companies are flat or prone.
What is the Mission Statement and Vision Statement Meaning in Business Essay? Image by StockSnap from Pixabay.
Positive and Normative Economics: Economics is often divided into two major aspects – positive and normative. Positive economics explains how the world works. The primary difference between Positive and Normative Economics; concerns with what is, rather than with what ought to be. Normative economics is concerning what ought to be rather than what is. It proposes solutions to society’s economic problems. That there is unemployment in India is a problem of positive economics. What measures can adopt to solve the problem is a problem of normative economics. Normative economics also knows as welfare Economics.
How to Explain the difference between Positive and Normative Economics?
The distinction between positive economics and normative economics may seem simple, but it is not always easy to differentiate between the two. Positive economics is objective and fact-based, while normative economics is subjective and value-based. Positive economic statements must be able to test and prove or disprove. Normative economic statements are opinion based, so they cannot prove or disprove. Many widely-accepted statements that people hold as fact are value-based.
For example, the statement, “government should provide basic healthcare to all citizens” is a normative economic statement. There is no way to prove whether the government “should” provide healthcare; this statement is based on opinions about the role of government in individuals’ lives, the importance of healthcare, and who should pay for it.
The statement, “government-provided healthcare increases public expenditures” is a positive economic statement, as it can prove or disprove by examining healthcare spending data in countries like Canada and Britain, where the government provides healthcare.
Disagreements over public policies typically revolve around normative economic statements, and the disagreements persist because neither side can prove that it is correct or that its opponent is incorrect. A clear understanding of the difference between positive and normative economics should lead to better policy-making if policies are made based on facts (positive economics), not opinions (normative economics). Nonetheless, numerous policies on issues ranging from international trade to welfare are at least partially based on normative economics.
Positive Science or Normative Science!
Positive science implies that science which establishes the relationship between cause and Effect. In other words, it scientifically analyses a problem and examines the causes of a problem. For example, if prices have gone up, why have they gone up.
In short, problems are examining based on facts. On the other hand, normative science relates to normative aspects of a problem i.e., what ought to be. Under normative science, conclusions and results are not based on facts, rather they are based on different considerations like social, cultural, political, religious, and son are is subjective, an expression of opinions.
In short, positive science concerns with “how and why” and normative science with ‘what ought to be’. The distinction between the two can explain with the help of an example of an increase in the rate of interest. Under positive science it would look into why the interest rate has gone up and how can it reduce whereas under normative science it would see as to whether this increase is good or bad. Three statements about positive and normative science each are given below:
Positive Science:
The following topic below are;
The main cause of price-rise in India is the increase in the money supply.
It bases on a set of collected facts.
Prices and inequalities of income level in an economy.
Production of food grains in India has increased mainly because of an increase in irrigation facilities and the consumption of chemical fertilizers.
The rate of population growth has been very high partly because of the high birth rate and partly because of the decline in the death rate.
Studies with what is or how the economic problem originally solves.
It can verify with the original data.
It aims to provide an original description of economic activity.
Normative Science:
The following topic below are;
Inflation is better than deflation.
It bases on the opinion of the individual.
The government should generate more employment opportunities.
More production of luxury goods is not good for a poor country like India.
Inequalities in the distribution of wealth and incomes should reduce.
Studies with what ought or how the economic problem should solve.
It cannot verify with the original data.
It aims to determine the principles.
Difference between Positive and Normative Economics
Positive and Normative Economic Statements:
The following Statements topic below are;
Positive statements: Positive statements are objective statements that can test, amend, or reject by referring to the available evidence. Positive economics deals with objective explanations and the testing and rejection of theories. For example; A fall in incomes will lead to a rise in demand for own-label supermarket foods. And, If the government raises the tax on beer, this will lead to a fall in profits of the brewers.
Normative Statements: A value judgment is a subjective statement of opinion rather than a fact that can be tested by looking at the available evidence. Normative statements are subjective statements – i.e. they carry value judgments. For example; Pollution is the most serious economic problem. Unemployment is more harmful than inflation, and. The government is right to introduce a ban on smoking in public places.
What does the Statement of Cash Flows mean? In accounting, a statement of cash flows, also known as the cash flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Explanation of Statement of Cash Flows with Objectives. The statement of cash flows is one of three very important financial reports. That managers and investors look at when analyzing a company’s past or present financial status.
Know and Understand the Concept of the Statement of Cash Flows.
The balance sheet and the income statement are the other two reports. All of these reports are very important in running a successful business. But the statement of cash flows is the most important. It is like the blood of a company since it would not survive successfully without it. Cash on hand can be much more important. Than income, profits, assets, and liabilities put together, especially in the early stages of any company.
Introduction:
The statement of cash flows tells us how much cash we have on hand after all costs are met. It shows how much cash we started with and how much we pay out. There are two parts to the statement of cash flows which are the top and bottom halves. The top half deals with the inflow and outflow of the company’s cash.
The bottom half of the statement reports where the funds end up. Just like the balance sheet, the top and bottom halves of a cash flow statement match. Knowing just how important it is to have cash on hand to pay the bills we want to make sure and review cash flow statement regularly.
Cash flow is a little more honest than an income statement because the cash flow statement shows money coming in only when we deposit it and money going out only when we physically write out a check. Because the statement of cash flows reflects the actual receipt of cash, no matter where it comes from, the entries are a bit different from the revenue shown in a company’s income statement.
These funds are usually made up of gross receipts on sales, dividend and interest income, and invested capital. Gross receipts on sales represent the total money that we take in on sales during the period. Gross receipts are based on our gross revenue, of course, but they also take into account when you receive payment. Dividend and interest income is the income that we receive from savings accounts and other securities.
Meaning:
The statement of cash flows is one of the financial statements issued by business and describes the cash flows into and out of the organization. Its particular focus is on the types of activities that create and use cash, which are operations, investments, and financing. Though the statement of cash flows is generally considered less critical than the income statement and balance sheet, it can use to discern trends in business performance that are not readily apparent in the rest of the financial statements.
This is one of those amounts that are also reporting on the income statement and should be the same as long as we receive the money during the period covered by the cash flow statement. Invested capital is part of the owner’s equity in the balance sheet. Although it does not represent revenue from our business operations and would not be part of the income statement, it can be a source of cash for our company.
Extra Knowledge:
The statement of cash flows keeps track of the costs and expenses that incur for anything and everything. Some of the expenses appear in the income statement and some don’t because they don’t directly relate to our costs of doing business. These funds consist of the cost of goods produced, sales, administration, interest expense, taxes, etc. The cost of goods produced is exactly that, the cost incurred to produce our product or service during the period. Sales expenses are the same expenses that appear in an income statement except that paying off bills or postponing payments may change the amounts. On to the bottom half of the statement of cash flows which shows where the money is ending up.
When the company’s cash reserves raise the money flows into one or more of asset accounts. The bottom half of the cash flow statement keeps track of what is happening to those accounts. This part of the statement consists of changes in liquid assets and net change in cash position. With cash flowing in and out of the company, liquid assets are going to change during the period covered by the cash flow statement. The items listed in this portion of the cash flow statement are the same ones that appear in the balance sheet. Raising the level of our liquid asset accounts has the effect of strengthening the cash position.
Explanation of Statement of Cash Flows with Objectives, #Pixabay.
Cash flow analysis:
To properly construct a cash flow analysis, we have to look at three very important activities which are operating, investing and financing.
Operating activities are the cash components that are generating from the sales of the companies goods or products affecting the core business operation. These include the purchase of raw materials, production costs, advertising cost and even the delivery to customers.
Investing activities are straight forward items that report adjustments in the balances of fixed asset accounts like equipment, buildings, land, and vehicles. Investing activities include making and collecting loans and acquiring and disposing of investments and property, plant and equipment.
Financing activities are cash adjustments to fixed liabilities and owners’ equity. Cash increases when the company takes up a loan or raised capital when dividends are paid out, cash decreases accordingly. Financing activities involve liabilities and owner’s equity items. They include obtaining resources from owners and providing them with a return on their investments and borrowing money from creditors to repay the amounts borrowed.
#Objectives of the statement of cash flows:
There are a few main objectives of the statement of cash flows one of which is to help assess the timing, amounts and the uncertainty of future cash flows. This is one of the quarterly financial reports that publicly traded companies are required to release to the public. Because public companies tend to use accrual accounting. The income statements they release each quarter may not necessarily reflect changes in their cash positions.
The statement of cash flows is very important to businesses. Because it helps investors see where the company can benefit from better cash management. There are many profitable companies today that still fail at adequately managing their cash flow. So it is important to be able to see where the weaknesses are to correct them.
Conclusion of Objectives:
In conclusion, the objectives are to explain why the statement of cash flows is very important for companies and people. That want to invest in a certain company. It shows how well a company manages its cash in-comings and outgoings as well as showing how profitable a company might be or become.
It is a very clear document to understand so that we don’t fall victim to making a profit while still going broke. It’s also helpful for the companies finance department. So that they can see where the company stands to get more potential investors. It’s a great resource to look at to recap a company’s financial standing that most people can understand.
What does Financial Statements mean?
A firm communicates to the users through financial statements and reports. The financial statements contain summarized information of the firm’s financial affairs, organized systematically. Preparation of the financial statements is the responsibility of top management. They should prepare very carefully and contain as much information as possible.
Two basis financial statements prepared for external reporting to owners, investors, and creditors are:
Balance sheet:
The balance sheet contains information about the resources and obligations of a business entity and about. Its owner’s interests in the business at a particular point of time. In accounting’s terminology, balance sheet communicates. Information about assets, liabilities and owner’s equity for a business firm as on a specific date. It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.
Profit and loss account:
The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for some time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.
More information requires planning and controlling and therefore the financial accounting information is presenting in different statements and reports in such a way as to serve the internal needs of management. Financial statements are preparing from the accounting records maintaining by the firm.
The various objectives of financial statements are:
To provide reliable financial information about economic resources and obligations of a business enterprise.
To provide reliable information about changes in the resources of an enterprise that result from the profit-directed activities.
Also, financial information that assists in estimating the earning potential of the enterprise.
To provide other needed information about changes in economic resources and obligations.
To disclose, to the extent possible, other information related to the financial statement that is relevant to statement users.
Cash Flow Statements; In financial accounting, a cash flow statement, also known as the statement of cash flows, is a financial statement. That shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. What does Cash Flow Statements mean? Introduction, Meaning, and Definition; Essentially, the cash flow statement concerns with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.
Know and Understand the concept of Cash Flow Statements with their Introduction, Meaning, and Definition.
The cash flow statement was previously known as the flow of funds statement. The cash flow statement reflects a firm’s liquidity. The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point in time. And, the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues.
The cash flow statement includes only inflows and outflows of cash and cash equivalents. It excludes transactions that do not directly affect cash receipts and payments. These noncash transactions include depreciation or write-offs on bad debts or credit losses to name a few. The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Noncash activities are usually reporting in footnotes. As well as know more; Cash Flow Statement: Explanation, Classification, and Objectives.
#Introduction to Cash Flow Statements:
Did you know? You can earn our Financial Statements Certificate of Achievement when you join PRO Plus. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium financial statements materials. These include our video seminar, visual tutorial, flashcards, cheat sheet, quick tests, a quick test with coaching, business forms, and more. The official name for the cash flow statement is the statement of cash flows. The statement of cash flows is one of the main financial statements.
#Meaning of Cash Flow Statements:
Cash Flow Statement is a statement which describes the inflows (sources) and outflows (uses) of cash and cash equivalents in an enterprise during a specified period. Such a statement enumerates the net effects of various business transactions on cash. And, its equivalents and takes into account receipts and disbursements of cash.
A cash flow statement summarizes the causes of changes in the cash position of a business enterprise between dates of two balance sheets. According to AS-3 (Revised), an enterprise should prepare a cash flow statement and should present it for each period for which financial statements are prepared.
Extra Knowledge:
The terms cash, cash equivalents, and cash flows are used in this statement with the following knowledge of meaning below are:
Cash comprises cash on hand and demand deposits with banks.
The cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash equivalents are held to meet short-term cash commitments rather than for investment or other purposes.
For an investment to qualify as a cash equivalent. It must be readily convertible to a knows amount of cash and be subject to an insignificant risk of change in value. Therefore, an investment normally qualifies as a cash equivalent only. When it has a short-maturity, of say, three months or less from the date of acquisition.
Investments in shares are excluding from cash equivalents unless they are, in substance, cash equivalents. For example, preference shares of a company acquired shortly before their specified redemption date.
If the effect of the transaction increases cash and its equivalents. It calls an inflow (source) and if it results in the decrease of total cash, it knows as outflow (use) of cash.
Cash flows exclude movements between items that constitute cash or cash equivalents. Because these components are part of the cash management of an enterprise rather than part of it’s operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents.
What does Cash Flow Statements mean? Introduction, Meaning, and Definition, #Pixabay.
#Definition of Cash Flow Statements:
Cash flow statements a statement of changes in the financial position of a firm on a cash basis. It reveals the net effects of all business transactions of a firm during. A period on cash and explains the reasons for changes in cash position between two balance sheet dates.
It shows the various sources (i.e., inflows) and applications (i.e., outflows) of cash during. A particular period and their net impact on the cash balance. The following definition of Cash flow statements as define by different-different authors below;
According to Khan and Jain:
“Cash Flow statements are statements of changes in financial position prepared on the basis of funds defined as cash or cash equivalents.”
The Institute of Cost and Works Accountants of India defines Cash Flow statement as,
“A statement setting out the flow of cash under distinct heads of sources of funds and their utilization to determine the requirements of cash during the given period and to prepare for its adequate provision.”
Thus, a cash flow statement is a statement which provides a detailed explanation for the changes in a firm’s cash balance during a particular period by indicating. The firm’s sources and uses of cash and, ultimately, the net impact on cash balance during that period.
Explanations:
The cash flow statement intends to provide information on a firm’s liquidity and solvency. And, its ability to change cash flows in future circumstances provide. Additional information for evaluating changes in assets, liabilities, and equity improve the comparability of different firm’s operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows.
The cash flow statement has been adopting a standard financial statement. Because it eliminates allocations, which might derive from different accounting methods. Such as various time-frames for depreciating fixed assets.
What does Cash Flow Statement mean? A cash flow statement counters the ambiguity regarding a company’s solvency that various accrual accounting measures create. We are studying Cash Flow Statement: Explanation, Classification, and Objectives; In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
Here explains the Concept of Cash Flow Statement with their Explanation, Classification, Objectives, and Limitations.
The following concept is; Explanation of Cash Flow Statement, Classification of Cash Flow Statement, Objectives of Cash Flow Statement, and Limitations of the Cash Flow Statement.Meaning: A Cash Flow Statement is a statement which is prepared by acquiring Cash from different sources and the application of the same for different payments throughout the year. It is prepared from analysis of cash transactions, or it converts the financial transactions prepared under accrual basis to cash basis.
The information about the number of resources provided by operating activities or net income after the adjustment of certain other charges can also obtain from it. The changes in Cash both at the beginning and at the end can also know with the help of this statement and that is why it is called Cash Flow Statement.
#Explanation of Cash Flow Statement:
A cash flow statement is an important indicator of financial health because a company can show profits while not having enough cash to sustain operations. It is a financial report that shows to the user the source of a company’s cash and how it was spent over a specific period. A cash flow statement counters the ambiguity regarding a company’s solvency that various accrual accounting measures create.
It also categorizes the sources and uses of cash to provide the reader with an understanding of the amount of cash a company generates and uses in its operations. As opposed to the amount of cash provided by sources outside the company. Such as borrowed funds or funds from stockholders. They also tell the reader how much money was spent on items that do not appear on the income statement. Such as loan repayments, long-term asset purchases, and payment of cash dividends.
The cash flow statement was previously known as the flow of funds statement. The cash flow statement reflects a firm’s liquidity. The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point in time, and the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues.
Extra Knowledge:
They include only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non-cash transactions include depreciation or write-offs on bad debts or credit losses to name a few. It is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes.
It is intended to provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances provide additional information for evaluating changes in assets, liabilities, and equity improve the comparability of different firms’ operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows. The cash flow statement has been adopting as a standard financial statement because it eliminates allocations, which might derive from different accounting methods, such as various time-frames for depreciating fixed assets.
#Classification of Cash Flow Statement:
The cash flow statement should report cash flows during the period classification by operating, investing and financing activities.
Thus, cash flows are classifying into three main categories:
Operating activities.
Investing activities.
Financing activities.
Now, explain;
Operating Activities:
Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans, and make new investments without recourse to external sources of financing.
Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss.
Explanations:
Examples of cash flows from operating activities are:
A cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits.
Cash receipts from the sale of goods and the rendering of services.
Cash receipts from royalties, fees, commissions, and other revenue.
The cash payments to suppliers of goods and services.
Cash payments to and on behalf of employees.
Refunds or cash payments of income taxes unless they can specifically identify with financing and investing activities, and.
Cash receipts and payments relating to futures contracts, forward contracts, option contracts, and swap contracts when the contracts are heling for dealing or trading purposes.
Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which includes in the determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.
Investing Activities:
Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been making for resources intended to generate future income and cash flows.
Explanations:
Examples of cash flows arising from investing activities are:
The cash payments to acquire fixed assets. These payments include those relating to capitalized research & development costs and self-constructed fixed assets.
Cash receipts from the disposal of shares, warrants, or debt instruments of other enterprises and interests in the joint venture.
Cash advances and loans made to third parties, other than advances and loans made by a financial enterprise.
The cash receipts from disposal of fixed assets.
Cash receipts from the repayment of advances and loans made to third parties, other than advances and loans of a financial enterprise.
Cash payments to acquire shares, warrants, or debt instruments of other enterprises and interests in joint ventures. Other than payments for those instruments considering to be cash equivalents and those held for dealing or trading purposes.
The cash payments for futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are heling for dealing or trading purposes, or the payments are classifying as financing activities, and.
Cash receipts from futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are heling for dealing or trading purposes or the receipts are classifying as financing activities.
Financing Activities:
Financing activities are activities that result in changes in the size and composition of the owner’s capital and borrowings of the enterprise. The separate disclosure of cash flows arising from financing activities is important because .it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.
Explanations:
Examples of cash flows arising from financing activities are:
Cash proceeds from issuing shares or other similar instruments.
Cash proceeds from issuing debentures, loans, notes, bonds, and other short-or long-term borrowings, and.
The cash repayments of amounts borrowed such as redemption of debentures, bonds, preference shares.
Cash Flow Statement: Explanation, Classification, and Objectives, #Pixabay.
#Objectives of Cash Flow Statement:
The primary objectives of the cash flow statement are to supply the necessary information relating to the generation of cash to the users of the financial statement. It also highlights the future or prospective cash positions i.e. cash or cash equivalent. The inflows and outflows of cash can represent with the help of this statement.
The main objectives of the cash flow statement are:
Measurement of Cash:
Inflows of cash and outflows of cash can measure annually. Which arise from operating activities, investing activities and financing activities.
Generating inflow of Cash:
Timing and certainty of generating the inflow of cash can know. Which directly helps the management to take financing decisions in the future.
Classification of activities:
All the activities are classifying into operating activities, investing activities and financing activities. Which help a firm to analyze and interpret its various inflows and outflows of cash.
Prediction of the future:
A cash flow statement, no doubt, forecasts the future cash flows. Which help the management to take various financing decisions since synchronization of cash is possible.
Supply necessary information to the users:
A cash flow statement supplies various information relating to inflows and outflows of cash to the users of accounting information in the following ways:
Assess the ability of a firm to pay its obligations as soon as it becomes due.
Analyze and interpret the various transactions for future courses of action.
To see the cash generation ability of a firm, and.
Ascertain the cash and cash equivalent at the end of the period.
Helps the management to ascertain cash planning:
No doubt, a cash flow statement helps the management to prepare. Its cash planning for the future and thereby avoid any unnecessary trouble.
Evaluation of future cash flows:
Whether the cash flow from operating activities is quite sufficient in the future to meet the various payments e.g. payment of expense/debts/dividends/taxes.
Assessing liquidity and solvency position:
Both the inflows and outflows of cash and cash equivalent can know, and as such, liquidity and solvency position of a firm can also maintain as timing and certainty of cash generation knows i.e. It helps to assess the ability of a firm to generate cash.
#Limitations of the Cash Flow Statement:
Despite several uses, the cash flow statement suffers from the following limitations:
As the cash flow statements based on the cash basis of accounting. It ignores the basic accounting concept of accrual basis.
A cash flow statements, not a substitute for an income statement it is complementary to an income statement. Net cash flow does not mean the net income of a firm.
A cash flow statement is also not a substitute of funds flow statement which. Provides information relating to the causes that lead to an increase or decrease in working capital.
The comparative study of cash flow statements may give misleading results.
Some people feel that as working capital is a wider concept of funds. A funds flow statement provides a more complete picture than the cash flow statement, and.
Cash flow statements not suitable for judging the profitability of a firm as non-cash charges are ignored while calculating cash flows from operating activities.
What does the Fund Flow Statement mean? Funds flow statement is the statement of sources and uses of the fund. Fund Flow Statement: Explanation, Importance, and Structure.Funds flow statement shows the source from which the funds are received and the areas to which they obtained funds have been utilized. Funds flow statement indicates various mean by which funds were received during a particular period and the ways in which these funds were applied. Also learned, Venture Capital: Introduction, Definition, Characteristics, Advantages, and Disadvantages.
The Concept of Fund Flow Statement.
The topic is studying; Explanation of Fund Flow Statement, Meaning of Fund Flow Statement, Definition of Fund Flow Statement, Importance of Fund Flow Statement, and Structure of Fund Flow Statement. Funds flow statement comprises three words- fund, flow, and statement. “Fund” means the financial resources used by a concern. In the sense of working capital. The excess current asset over the current liabilities is called net working capital.
Similarly. The term “Flow” means the movement of funds and includes both inflows (receipt) and outflows (payments) of found. Funds from the operation, issue of share and debentures, additional long term debt, non-operating revenues etc. are considered as the major sources of fund. Increase in working capital, the redemption of the debenture, repayment of the long term loan, payment for non-operating expenses etc. are the amine areas of uses of the fund.
The term “Statement” represents the format or account under which the flows of fund i.e. cash inflows and outflows are recorded. Funds flow statement is known by various names such as statements of sources and uses of funds, the summary of financial operations, which got and where go statement, movement of the working capital statement, funds received and disbursement statement etc.
#Explanation of Fund Flow Statement:
The balance sheet and income statement are the traditional basis financial statements of concern. They furnish useful financial information regarding the operation of the concern; however, a serious limitation of these statements is that they fail to provide of time regarding changes in the financial position of a concern during a particular period of time. Funds flow statement, which is known as the statement of changes in financial position, overcomes these limitations of traditional financial statements.
Funds flow statement is the statement of sources and uses of the fund. Funds flow statement shows the source from which the funds are received and the areas to which they obtained funds have been utilized. Funds flow statement indicates various mean by which funds were received during a particular period and the ways in which these funds were applied.
Meaning of Fund Flow Statement:
A fund flow statement is a statement in summary form that indicates changes in terms of financial position between two different balance sheet dates showing clearly the different sources from which funds are obtained and uses to which funds are put. The profit and loss account and balance sheet statements are the common important accounting statements of a business organization.
The profit and loss account provides financial information relating to only a limited range of financial transactions entered into during an accounting period and its impact on the profits to be reported. The balance sheet contains information relating to capital or debt raised or assets purchased. But both the above two statements do not contain a sufficiently wide range of information to make an assessment of the organization by the end user of the information.
In view of the recognized importance of capital inflows and outflows, which often involve large amounts of money should be reported to the stakeholders, the funds flow statement is devised. In funds flow analysis, the details of financial resources availed and the ways in which such resources are used during a particular accounting period, are given in a statement form called “Funds flow statement”.
The sources of funds also include the funds generated from operations internally. The funds flow statement can explain the reasons for the liquidity problems of the firm even though it is earning profits. It helps the efficient working capital management and indicates the ability of the firm in servicing its long-term debt obligations. The changes in working capital position can also be tracked by observing the surplus/deficit of funds during a particular accounting period.
Definition of Fund Flow Statement:
Funds Flow Statement is a method by which we study changes in the financial position of a business enterprise between the beginning and ending financial statements dates. It is a statement showing sources and uses of funds for a period of time.
Some definitions of financial experts are given for the clear conception of fund flow statement:
Foulke defines these statements as:
“A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates.”
According to R. N. Anthony:
“The fund’s flow statement describes the sources from which additional funds were derived and the use to which these sources were put.”
I.C.W.A. in Glossary of Management Accounting terms defines Funds Flow Statement as,
“A Statement prospective or retrospective, setting out the sources and applications of the funds of an enterprise. The purpose of the statement is to indicate clearly the requirement of funds and how they are proposed to be raised and the efficient utilization and application of the same.”
Roy A. Fouke defines a fund flow statement as,
“A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates.”
Thus, the fund flow statement reveals the volume of financial transactions and explains the flow of funds taking place within a business during a particular period of time and its effect on the net working capital. It is not a substitute for either the Profit and Loss Account or the Balance Sheet, but it is a useful supplement to them. It describes the sources from which funds are obtained and the uses of these funds, in a condensed form.
#Importance of Fund Flow Statement:
A funds flow statement is an essential tool for financial analysis and is of primary importance to financial management. Nowadays, it is being widely used by the financial analysts, credit granting institutions and financial managers.
The basic purpose of a funds flow statement is to reveal the changes in the working capital on the two balance sheet dates. It also describes the sources from which additional working capital has been financed and the uses to which working capital has been applied.
The importance of fund flow statement may be summarised:
Analyses Financial Statements:
Balance Sheet and Profit and Loss Account do not reveal the changes in the financial position of an enterprise. Fund flow analysis shows the changes in the financial position between two balance sheet dates. It provides details of inflow and outflow of funds i.e., sources and application of funds during a particular period.
Hence it is a significant tool in the hands of the management for analyzing the past, and for planning the future. They can infer the reasons for imbalances in the uses of funds in the past and take corrective measures for the future.
Answers Various Financial Questions:
Fund flow statement helps us to answers various financial questions such as:
How many funds flowed into the business?
How much of these funds were provided by the operations?
What are the other sources of funds?
How were these funds used?
Why was there less/more amount of net working capital at the end of the period than at the beginning?
Why were the dividends not larger?
How was the purchase of fixed assets financed?
Where has the net profit is gone?
How were the loans repaid?
Rational Dividend Policy:
Sometimes it may happen that a firm, instead of having sufficient profit, cannot pay dividend due to inadequate working capital. In such circumstances, fund flow statement shows the working capital position of a firm and helps the management to take policy decisions on dividend etc.
Proper Allocation of Resources:
Financial resources are always limited. So it is the duty of the management to make its proper use. A projected fund flow statement enables the management to take the proper decision regarding allocation of limited financial resources among different projects on a priority basis.
Guide to Future Course of Action:
The future needs of the fund for various purposes can be known well in advance from the projected fund flow statement. Accordingly, timely action may be taken to explore various avenues of the fund. A projected funds flow statement also acts as a guide for the future to the management.
The management can come to know the various problems it is going to face in near future for want of funds. The firm’s future needs of funds can be projected well in advance and also the timing of these needs. The firm can arrange to finance these needs more effectively and avoid future problems.
Proper Managing of Working Capital:
It helps the management to know whether working capital has been effectively used to the maximum extent in business operations or not. It depicts the surplus or deficit in working capital than required. This helps the management to use the surplus working capital profitably or to locate the resources of additional working capital in case of scarcity. A funds flow statement helps in explaining how efficiently the management has used its working capital and also suggests ways to improve the working capital position of the firm.
Guide to Investors:
It helps the investors to know whether the funds have been used properly by the company. The lenders can make an idea regarding the creditworthiness of the company and decide whether to lend money to the company or not.
Evaluation of Performance:
Fund flow statement helps the management in judging the financial and operating performance of the company.
Fund Flow Statement: Explanation, Importance, and Structure, #Pixabay.
#Structure of Fund Flow Statement:
The structure of fund flow statement like other accounting statements is based on the equality of financial assets and liabilities.
To bring the form of fund flow statement on a scientific line, the fund flow statement is divided into two parts:
Schedule of working capital changes, and.
Statement of sources and uses of the fund.
Now explain;
Schedule of Working Capital Changes:
This schedule is also called “Comparative Change in Working Capital Statement” of “Statement of Working Capital Changes” or “Working Capital Variation Statement” or “Net Current Assets Account” or “Working Capital Account”. The increase in working capital is treated as use of fund and decrease in working capital is termed as sources of fund.
This statement or schedule is prepared in such a way or form as to indicate the amount of working capital at the end of two years as well as increase or decrease in the individual items of current assets and current liabilities.
The following rules should be taken into account while ascertaining the increase or decrease in individual items of current assets and current liabilities and its impact on working capital:
Increase in the items of Current Assets will increase the Working Capital.
The decrease in the items of Current Assets will decrease the Working Capital.
Increase in the items of Current Liabilities will decrease the Working Capital.
The decrease in the items of Current Liabilities will increase the Working Capital.
Statement of Sources and Uses of Fund:
This is the second but most important part of Fund Flow Statement. It is prepared on the basis of the changes in Fixed Assets. The preparation of Statement of Sources and Uses of Fund involves the ascertainment of increase/decrease in the various items of fixed assets, long term liabilities and share capital in the light of additional information given below.
To give an idea of the different items of sources and uses, the probable items of sources and uses of the fund are tabulated below.
Sources of Fund:
The following sources below are;
An issue of fresh shares (derived from an increase in share capital).
The Issue of Debentures (derived from the increase in debentures).
Raising of new loans (derived from the increase in long term loans).
Sale of fixed assets for cash or for other current assets (derived from the decrease in fixed assets and additional information).
Non-trading income.
Profit from operations (before deducting non-cash items of expenses and losses and before adding non-cash, non-trading income), and.
The decrease in working capital (derived from the schedule of working capital changes).
Uses of Fund:
The following uses below are;
Redemption of Preference Shares in cash (derived from the decrease in share capital).
Redemption of debentures in cash (derived from the decrease in debentures).
Repayment of loans (derived from the decrease in long-term loans).
Purchase of fixed assets for consideration other than shares, debentures or long term debt (derived from the increase in fixed assets and additional information).
Loss from operations.
Payment of dividend in cash, and.
Increase in working capital (derived from the schedule of working capital changes).
