The ability to understand the financial health of a company is vital to an investor, financial advisor, entrepreneur or manager. Financial statements offer a window into the financial health of a company. With this knowledge investors can make informed decisions on investments to make. Here are a few financial jargons explained to help you understand the financial statements. A company’s financial statement has three key parts – Balance Sheet, Profit and Loss account and Cash Flow Statement. Let’s discuss them further –

• Balance Sheet – A Balance Sheet represents the company’s financial details from the time it was established. It comprises three components – Assets, Liabilities and Equity. The total of Liabilities and Equity = Assets. They are two sides of the Balance Sheet and they always tally. This is a basic fundamental rule of financial accounting.
  • Assets – These are the things of value that a company owns like Land and Building, Inventory, Machinery, Patent, etc which has generated revenue or will help generate in the future.
  • Liabilities – It is the financial obligation of the company that it owes others like outstanding rent or salary, money owed to a debtor, etc.
  • Equity – This refers to the Net Worth of the company, Asset – Liabilities = Equity. It is the money left after all the assets are sold and liabilities are met, this money belongs to the shareholders.

A company which has more assets and equity than liabilities has a strong Balance Sheet and is considered as a good option to make investments.

Profit and Loss Statement (P&L) – A P&L statement details all the revenue earned and expenses incurred for that accounting period. It tells us the profitability of the company. Revenue – Expense = Profit.

• Expenses – It includes all the expenses incurred to run the company, like procuring raw material, salary, rent, electricity, etc, which help earn the revenue.
• Revenue – It includes all the revenue earned by the company – from the sales or others (investments, royalties, dividends, etc). Revenue does not equate to profit, it is only the income earned. To arrive at the Net Profit, operating expenses, other miscellaneous expenses and taxes have to be deducted.

• Cash Flow Statement – Cash Flow Statement details the movement of cash in and out of the business in that particular accounting period. Cash Flow is further segregated into three parts –
  • Financial Activities – Includes loans, fresh capital issue, and purchase of machinery – will appear as a negative whereas repayment of loan will appear as a positive.
  • Operational Activities – expenses related to hiring, advertisements, sales – a positive figure would mean that the company is able to generate money from its operations.
  • Investing Activities – This records the activity from purchase or selling of assets.