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In continuing our conversation of understanding financial statements, we’re defining each report.
The Balance Sheet defines a business’ financial position as of the date it is prepared. Further, it provides the organization’s financial flexibility to acquire capital, whether it can pay its bills on time, and if it has the ability to distribute dividends to shareowners. This document shows the company’s assets, liabilities, and shareholder’s equity.
Profit & Loss Statement or P&L (a.k.a. Income Statement) delivers both the profitability and earning of a business for a specific period of time. This periodic nature of this report is crucial as this provides readers to compare the findings over similar periods and compare with other companies. While there are several segments of the P&L, the continuing operations category is of primary concern because this can be predictive of future earnings.
The Statement of Retained Earnings provides the way net income and distribution of dividends affected the company’s financial position during the stated, specific time period. Net income during the period increases the balance of retained earnings, while declaration of dividends to the stockholders decreases retained earnings. The retained earning equation which describes this relationship is Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings.
Statement of Cash Flows Report typically is segmented into three sections: Cash flow from Operating Activities, Cash flow from Investing Activities, and Cash flow from Financing Activities. Each cash flow source can be positive or negative. Like other the 2 above reports, these findings are for a specific time period. This report includes information on inflows and outflows of cash.
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