Financial statements are prepared based on transactions recorded in a company’s book of

accounts. These statements are some of the most reliable data points to check the financial
position of a company.

These statements help analyse any profitability issue, investigate the details of business
transactions and monitor the Year-on-Year (YOY) performance of a company and its
competitors.

Balance sheet – Assets

A balance sheet tells you about the financial position of a company at a certain point in time. It
shows what an entity owns, how much it owes to others, and the amount invested in the
business by different stakeholders. It follows a basic accounting equation, which is given below:

Assets = Liability + Equity

A balance sheet is divided as shown in the image given below.

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Non-current assets include line items as shown in the image given below.

Current assets include line items as shown in the image given below.

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 Balance sheet – Liabilities and Equity

Equity includes line items as shown in the image given below.

Balance sheet – Liabilities and Equity

Liabilities are subdivided into current liabilities and non-current liabilities. Non-current liabilities
include the following line items:

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Current liabilities include the following line items:

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 Balance Sheet of Service Companies

The balance sheet of a service company is different from that of a manufacturing company. The
key difference is that

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 Profit and Loss Statement

The profit and loss statement helps a business manager judge the financial performance of their
company by analysing the income and expenses that the firm has earned and incurred,
respectively, over a period of one financial year. The major line items in the profit and loss
statement are given in the image provided below:

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 ● The various types of expenses incurred by a company are mentioned in the image given
below.

The formula for calculating the cost of goods sold is as follows:

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 ● Gross profit assesses the efficiency of a company in utilising its labour and raw
materials. The formula for calculating gross profit is as follows:

● Operating profit (EBIT) shows the profit earned by a business from its core operations
before interest and tax expenses. The formula for calculating the operating profit is as
follows:

● Net profit refers to the income generated by the company after bearing all operating and
non-operating expenses. The formula for calculating the net profit is as follows:

A vertical analysis of the profit and loss statement is done to calculate each expense as a
percentage of the total revenue. This analysis helps in the following:

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 Profit and Loss Statement of Service Companies

The profit and loss statement of a service company is different from that of a manufacturing
company. The key differences are as follows:

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 Cash Flow Statement

Cash flow statements are financial statements that reflect a company’s liquidity position. Cash is
necessary to support the day-to-day operating activities of an organisation, such as paying
employee salaries, buying raw material, paying rent and other operating expenses.

While a company’s profit is arrived at as the excess of revenue over cost, the cash position may
differ from the accounting profit. This is because not every financial transaction or event will lead
to movement of cash. Hence, preparing a cash flow statement is essential. Cash inflows and
outflows occur owing to three major categories:

Operating activities
Investing activities
Financing activities

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 Cash Flow From Operating Activities

Cash flow from operating activities includes any cash inflow and outflow that occurs on account
of a company’s day-to-day operating activities. Some points related to this cash flow are as
follows:

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There are two methods of calculating cash flow from operating activities:

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Cash flow from operating activities can be derived by adjusting the profit before tax and can be
calculated as follows:

Cash Flow From Investing Activities

Cash flow from investing activity includes any cash inflow and outflow that is related to the sale
or purchase of the non-current assets of a company. Some points related to it are listed below:

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The different elements of cash flow from investing activities are as follows:

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 Cash Flow From Financing Activities

Cash flow from financing activities includes any cash inflow and outflow that occurs on account
of obtaining or repaying capital, for example, raising equity and borrowing long-term debt. Some
points related to it are as follows:

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