Understanding Key Financial Statements

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Analyzing Financial Statements
July 6, 2009

Ellen Tobey

Mr. William Mellett
Financial statements are created to give the small business owner a clear understanding of how their company is performing. Accurately prepared financial statements are important to manage the business, borrow money and pay the correct amount of tax. The three basic financial statements are the balance sheet, the income statement and statement of cash flows; each tells something different, however, they are completely interrelated. Decisions should be made considering all three statements. Purpose of Financial Statements

Financial statements are prepared using historical data are based on a specific time frame, and are not future projections. Properly prepared financial statements will give owners, managers and other stakeholders such as lender an understanding of the strengths and weaknesses of the business. Owners can make informed decisions and react to changes in the marketplace by preparing and posting daily, weekly, or monthly cash flow analysis of key aspects of production and sales. The appropriate amount of tax can be calculated and paid.

Balance Sheet: the balance sheet details assets, liabilities and equity and set up as a basic accounting equation whereby assets equal liabilities plus owner or shareholder equity. Assets are shown first, and are generally reported in order of liquidity. Current assets (those expected to be realized or consumed within one year or within the company’s accounting cycle) are reported first. These include cash, accounts receivable (i.e.: amounts owed from the sales of goods or services), inventory (finished goods, work-in-progress, raw materials and supplies), prepaid expenses and current maturities of notes receivables. Current assets may also include cash adavnced to employees, officers and shareholders. Fixed assets primarily include investments in land buidings, equipment and leasehold improvements which are...
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