Financial statements are written records showing a business’s activities and financial performance. Firms and government agencies audit these statements to show how a business had been paying taxes, investment opportunities, and how the firm is fairing financially. Therefore, financial statements significantly impact a business since they form a rich source of critical data for decision-making ( Lessambo, 2018 ). Several types of financial statements include income statements, cash flow statements, and balance sheets.
Each type of financial statement has a specific use in a business enterprise which also means that they impact decision-making differently. First, an income statement indicates a business’ overall profitability and can determine the stability and profit generation. As such, it will be used to check if a business is spending more than it is generating. Second, a balance sheet is a financial statement that is used to record a firm's assets, liabilities, and owners' equity at a particular point in time. Therefore, this statement is critical in the computation of net gain or net loss over that specific time. Last, the cash flow statement records how much cash a business generates and uses during a given period of time ( Lessambo, 2018 ). The statement will indicate the operating, investing, and financing activities of an organization.
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In a business environment, there is a difference between profit and cash flow. Profit will indicate the money that is left over after all expenses are settled, while cash flow shows how money is flowing into and out of business. A balance sheet will indicate assets such as cash, receivables stock, fixed assets, and intangible assets, while liabilities will include items such as account payables, accumulated expenses, and long-term debt.
In conclusion, the businesses must have a clear understanding of their financial statements as well as religiously recording information in each of the mentioned statements. These statements are important when it comes to making decisions such as those involving profitability and investment options.
References
Lessambo, F. I. (2018). Financial statements: Analysis and reporting. Palgrave Macmillan, Cham, https://doi.org/10.1007/978-3-319-99984-5.
