The market crash in 1929 had witnessed enacting legislation with an objective to avoid another such disaster. Publicly traded companies are required to disclose specific details pertaining to their financial positions and operations to this day. The 3 types of financial statements are the balance sheet, income statement & cash flow statement. These are considered to be informative tools that help traders to analyze the financial strength of any company and to know about its underlying value and financial health.
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3 Types of Financial Statements
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1. Income statement
Business operations for a specific year or quarter are published through this statement. You can get to know new asset inflow into any organization and also measure incurred outflows to produce revenue. Profitability is determined by revenues minus taxes paid and expenses borne. This statement is read starting with revenues from the top, referred to as ‘top line’. Costs & expenses get subtracted along with taxes. Net profit or income is the end result, prior to paying off dividends. It is referred to as the ‘bottom line’. Then is displayed average common share numbers of stock held by investors after which come earnings per share and declared dividends per common share.
2. Balance Sheet
It provides a snapshot of the financial position of an organization at any point in time. Being among the most important of the 3 types of financial statements, it shows what assets and liabilities are owned by the business, including differences between them. The book value of stockholders’ company stake is represented by this difference, termed balance sheet. Both sides need to balance, viz., Assets = Liabilities + Stockholders’ equity (which includes retained earnings, additional paid-in capital, and common stock). The balance sheet displays part of equity, assets that are debt-financed, liabilities that are listed in immediacy order, and assets that are listed from most to least liquid.
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3. Cash flow statement
The cash flow statement reflects the financial activity of an organization over a particular time period. It displays income receipts and future investments and expenses paid towards operations. It shows inflow/outflow cash management to present a better image of the company’s liquidity. Cash flow derived from operations is used by analysts to measure company performance since it offers greater transparency to help evaluate business health. Cash flow from financing & investing includes cash used or received through investing activities like stock purchase in other organizations, equipment, or additional property purchase.
All the 3 types of financial statements are vital for any business and help investors to measure the financial strength of the organization.