Explain financial planning Balance sheet, Income statement and Cash Flow Statement.

Explain financial planning Balance sheet, Income statement                   and Cash Flow Statement.

Answer:

Balance Sheet:

            “A statement, which shows the financial position of a business”.

“A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period”.

Elements of Balance Sheet:

1)       Assets:

                        “Assets are things that a company owns that have value”.

a)      Tangible assets

            A tangible asset is an asset that has physical form. Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory. The opposite of a tangible asset is an intangible asset

b)      Intangible assets

            An intangible asset is an asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace.

c)      Long-term investment

            A long-term investment is an account on the asset side of a company's balance sheet that represents the company's investments, including stocks, bonds, real estate and cash, that it intends to hold for more than a year.

d)      Deferred assets

            A deferred asset is an expenditure that is made in advance, and is not yet consumed. It arises from one of two situations: Short consumption period. The expenditure is made in advance, and the item purchased is expected to be consumed within a few months.

e)      Current assets.

            Cash and other assets that are expected to be converted to cash within a year.

2)       Liabilities:

           A liability is legally binding obligations payable to another entity. Liabilities incurred in order to fund the ongoing activities of a business. Examples of liabilities are accounts payable, accrued expenses, wages payable, and taxes.

a)      Authorized capital

            The authorized capital of a company (sometimes referred to as the authorized share capital, registered capital or nominal capital, particularly in the United States) is the maximum amount of share capital that the company is authorized by its constitutional documents to issue (allocate) to shareholders.

b)      Issued capital

            The share capital that has been issued to shareholders. This is part of a company's authorized capital (the maximum amount of capital a company can issue under its articles of association). The part that has not been issued is called unissued capital.

c)      Paid up capital

            Paid-up capital is the amount of money a company has received from shareholders in exchange for shares of stock. Paid-up capital is only created when a company sells its shares on the primary market directly to investors.

d)      Reserve

            A reserve is profits that have been appropriated for a particular purpose. Reserves are sometimes set up to purchase fixed assets, pay an expected legal settlement, pay bonuses, pay off debt, pay for repairs and maintenance, and so forth.

e)      Current liabilities.

            Current liabilities are a company's debts or obligations that are due within one year, appearing on the company's balance sheet and include short-term debt, accounts payable, accrued liabilities and other debts. Essentially, these bills are due to creditors and suppliers within a short period of time.

f)       Shareholders’ equity

            Shareholders equity is the difference between total assets and total liabilities. It is also the Share capital retained in the company in addition to the retained earnings minus the treasury shares.

Income Statement

A statement, which show the operation of business. It is also known as the profit and loss statement (P&L), statement of operations, or statement of earnings.

Elements of the Income Statement

1)      Revenue:

               Gross receipts earned by the company selling its goods or services

2)      Expenses:           

               The costs of the company to earn the gross receipts

3)      Gains:    

               Total revenue is greater than total expenses.

4)      Losses:

               Wise versa

Methods for Constructing the Income Statement

a)      Single Step Income Statement

        Single Step income statement totals revenues, and then subtracts all expenses to find the bottom line.

b)     Multiple Step Income Statement

        The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line.

Cash flow statement

        A financial statement shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities.

a)      Operating activities.

Operating activities are the functions of a business related to the provision of its offerings. These are the company's core business activities, such as manufacturing, distributing, marketing and selling a product or service

b)     Investing activities.

                    Investing activities are the second main category of net cash activities listed on the statement of cash flows and consist of buying and selling long-term assets and other investments. In other words, this is the net amount of cash received and paid during an accounting period for long-term assets and investments.

c)      Financing activities.

                    Financing activities are transactions with creditors or investors used to fund either company operations or expansions. These transactions are the third set of cash activities displayed on the statement of cash flows.