The account balance describes the financial state of the company as of a specific date and reflects the company's resources in the same currency. The balance consists of two parts-Assets, where the composition of resources of the company and directions of use are reflected and Liabilities in which the sources of funding the company are reflected.
If we consider separately the Assets and Liabilities, then the following division can be made.
The assets are divided into long-term and short-term ones.
- Long-term assets are the funds used during more than one cycles, are acquired to be used in entrepreneurial activity and are not subject to sale within one year.
- Short-term assets or current funds are the funds used during an accounting period.
To make correct financial decisions it is important to separate the following types from current assets:
- Monetary funds
- Short-term financial investments
- Accounts receivable
Monetary funds are the amounts available in the cash register and bank accounts, including foreign currency amounts.
Short-term financial investments are the investments made in the shares of other companies and securities.
Accounts receivable are the funds considered as firm but not yet received, as a balance item are accrued the funds, the repayment period of which does not exceed one year.
Inventory are the assets intended:
For sale during one business cycle
Raw materials used in production processes.
Long-term assets or fixed assets are the funds intended for long-term use, which have a tangible expression. Buidings, cars and equipment, transport means and so on are included in this subsection. Depreciation is calculated for all items of fixed assets (amortization).
Accounts Receivable reflect the decision of the company in connection with funding sources.
Short-term liabilities are the liabilities repaid with current assets or as a result of forming new short-term liabilities.
Short-term liabilities are usually repaid in a period not exceeding 3 years.
Short-term liabilities include such items as:
Short-term credit obligations
Long-term liabilities are liabilities payable in more than 3 years. The main items of long-term liabilities are long-term loans.
Own capital and investment The initial investment of business and the profit accumulated and not distributed during activity in included in this item.
You can familiarize yourself with the structure of the account balance in more detail and in the attached files.
INCOME EXPENDITURE STATEMENT (IES)
Income expenditure statement reflects the results of activity of a company within the last 1 year and shows shows how revenues and expenses were generated.
Income expenditure statement together with the account balance is considered as an important source of information for comprehensive financial analysis of the company.
The information reflected in this statement helps to assess the change of revenues and expenses during the accounting period, compare them with the results of previous year, calculate the dynamics of gross profit, net profit, the report helps to understand how and from what income the final profit is generated. Conducting such report allows to understand how efficiently the company is working and how justified are the investments made in the company.
The statement of cash flows supplements the account balance and IES. It the account balance reflects the financial state of the company at a specific point in time, the cash flow statement reveals the change in this or that balance sheet item. IES shows the results of a business activity for accounting period. This activity is considered the main factor changing cash flows, which in its turn is reflected in the statement of cash flows. This statement is useful and helps the interested parties to to assess the company's ability to attract and use cash, allows to assess the financial flexibility of the company.
Financial flexibility is the ability of the company to generate financial means to respond to unforeseen needs and opportunities.
The statement of cash flows consists of 3 main sections
Operational activity-cash flows generated from the main, income generating activity of the company
Investment activity- expenditure on resources that will be used to generate future income
Financial activity – cash flows associated with the formation of the company’s capital.
The statement of cash flows may be prepared in two methods:
Direct method in case of which the main types of gross cash receipts and expenses, in other words, the compilation of the IES report by the Cash Register method.
Indirect method in which case the calculations of net profit or loss are ractified, taking into account the impact of non-monetary operations on the change of the assets and liabilities of the company.