A GUIDE TO FINANCIAL STATEMENT | IMPORTANCE OF FINANCIAL KNOWLEDGE



INTRODUCTION
Business owners and financial managers must be able to properly “read” and interpret all financial statement, which are prime importance to every business organization.
            Accurate and comprehensive maintenance of the book keeping system facilities timely preparation of financial statements. These statements consist of three important documents namely: - Balance sheet, income statement and statement of cash flows.

1.         What Are Financial Statements?
Financial statements are documents showing the financial position of a company. The     four main statements are the balance sheet, income statement, cash flow statement, and statement of retained earnings (or shareholders’ equity).
2.         What Is the Meaning of Financial Statement Analysis?
Companies conduct financial statement analysis to understand their financial health during the statement period. By using these statements wisely, an individual can gauge the company’s present financial scenario, as well as make projections for the immediate future. The company also makes extensive use of financial ratios and graphs. With this, one understands the relation between the company’s assets and its productivity. Financial statement analysis is extremely beneficial for the company’s management, its shareholders, its creditors and the government.
*          Management’s Perspective
The company prepares its fiiancia1 statements at the end of every quarter and year. Once, these are prepared, the management gets a fair idea on its business performance during the period. It knows of its assets, cash and equity position at the end of the period. On the basis of these, it is then able to make its future decisions. It knows how much it has to spare and what are the assets that it requires to purchase most urgently. Also, the company can, after analyzing its financial ratios, take measures to increase its profitability.
*          Equity holder’s perspective
Analyzing financial statement, an individual is able to understand whether or not he must invest his money in the company’s shares. Only when the preposition looks profitable in the long run, will an individual plow his money.
Also, a present investor knows whether or not s11 must continue to retain her money in the company. She makes this decision based on the direction of share price movements. In case, the prices show an upward movement trend, the investor decides to keep the investment. In case, the prices have been falling lately, the investor decides to withdraw her money.
*          Creditor’s perspective
            Just as in the case of shareholders; financial statement analysis helps in reassuring the present creditors that their money is safe. They too can take their future decisions accordingly. Prospective creditors, by looking at financial statements, get a feel of the business. They use “comparative financial statements” to see the company’s growth path over different periods of time. This way they can determine whether or not the company’s vision aligns with their own.
*          Governmental Perspective
A company’s financial statement analysis is very helpful to the company. The government is able to calculate the taxes owed by the company. Also, it has a mechanism in place to check if the organization is projecting its finances correctly to the external world.

Why Financial Analysis Is Needed
Numbers on financial statements can be confusing. Analysis of the numbers gives you or outside investors a better perspective of how your company is            managing money and operations.
Ratio Analysis Example
A basic example is the current ratio which helps a business know whether it has enough resources to pay its debts. By dividing current assets by current liabilities from the ba1ance sheet, you can determine whether you have sufficient resources     available or if you need additional money to pay upcoming bills.
Interpreting Financial Statement Analysis
Financial statement ratios must be considered in the context of industry standards. Ratios should be compared to benchmarks of similar businesses to determine a company’s overall financial health.
Objective of financial statement by business owners
1.   The objective of financial statement is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wild range of users in making economic decisions.
2.   Financial statement should be understandable, relevant, reliable and comparable.
3.   Report assets, liabilities, equality, income and expenses are directly related to a business financial position.
4.   Financial statements are intended to be under stable by readers who have a reasonable knowledge of business ad economic activities.
5.   Owners and managers, required financial statements to make important decisions that affect it continued operations.
6.   Medical and general public are also interested in financial statements for a variety of reasons.
Financial Statement Analysis for Small
As a small-business owner, your financial statements provide you with valuable information about the financial well being c :your company. The process of compiling financial statements on a regular basis provides your company with the tools to evaluate your past performance and adapt to changing circumstances. In addition, the process of creating financial statements presents the opportunity to set goals and evaluate your progress relative to short-term and long-term objectives.

Income Statements.
Income statement: - This provides information about a company’s profitability i.e. the excess of its revenues over it expenses during a specific period.
Income statements provide information about how much your company has earned during the period in question by listing your various sources of income as well as your various categories of expenditures. By showing you how much you have earned, your income statement provides you with tools to assess whether your company’s earnings are sufficient to cover its expenses and also to meet your own financial needs. In addition, your income statement provides data about how your income is distributed relative to different businesses, activities, such as wholesale and retail sales.
Balance Sheets
Balance Sheet: - Provides information about a company’s excess of its assets over its liabilities at a specific moment of time.
Your balance sheet provides information about your overall financial wellbeing. A balance sheet is a snapshot listing your assets and liabilities on the particular day when it is compiled. It breaks down your assets into categories such as cash on hand, money owed to you and property you own. Examining this information can help you to assess whether you have enough in liquid assets, or money that is readily available when you need    it. Your balance sheet also breaks down your liabilities into different types of debt such as accounts payable and credit card debt. This information allows you to evaluate whether your debt load is sustainable, and whether your interest burden is too high.
Companies conduct financial statement analysis to understand their financial health during the statement period. By using these statements wisely, an individual can gauge the company’s present financial scenario, as well as make projections for the immediate future. The company also makes extensive use of financial ratios and graphs. With this, one understands the relation between the company’s assets and its productivity. Financial statement analysis is extremely beneficial for the company’s management, its shareholders, its creditors and the government.
Cash Flow Projections
Statement of cash flows: - Provides information of a company’s liquidity i.e., the excess of its available and incoming funds over its outgoing funds during a specific period. A cash flow projection is a forecast of your company’s financial activity during expect coming in with the sums you anticipate spending. By creating a detailed and realistic cash flow projection, you allow yourself to plan for shortfalls as well as busy periods, identifying times wren you will need extra cash and figuring out how you will obtain the necessary capital.
Goals
Your company can either set concrete, numerical goals or more subjective             objectives such as becoming a learning organization. Your financial statements provide direct information about whether or not you are meeting quantifiable goals such as increasing your sales by 50 percent over the next two years. Although your financial statements cannot provide direct evidence about whether or not your company is becoming a learning organization, they can help you identify trends that might interfere with your company’s learning potential, such as a trajectory of increasing debt

REFERENCES
SEC Guide To Financial Statement
Noobpreneuer.com importance of financial knowledge
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