Better understanding how the basic financial statements relate to one another an

Question

Better understanding how the basic financial statements relate to one another and inform one another helps you to better understand your business and keep better track of how the business is faring and anticipate resource needs. How does your cash flow analysis differ from your profit and loss (P&L, or income statement)?

What expenses are reflected on the P&L and not in your cash flow analysis?

Conversely, what expenses are shown on your cash flow statement and not in your P&L? Why are they different?

What information exists on your balance sheet that is of interest to banks?

How else might the information on the balance sheet be used?

Explanation / Answer

Basic Financial statements are the backbone of the whole accounting concept. Be it any organisation without financial statements, analysis of business is meaning less. Every user whether internal or external is interested to know the financial health of a particular company for that purpose financial statement is the key ingredient to know. For example we can only give feedback of a dish whether it is tasty or not when it is finally served similarly one can only analyse the financial condition of the organisation after the finalisation of the statements. Financial statements are prepared through the process after finalisation of trial balance. Financial statements like income statement, balance sheet & cash flow statement are directly related to trial balance. Income statement shows current year expenses & incomes while balance sheet shows all the capital structure, long term investments & fixed assets. Assets are subject to depreciation hence balance sheet is directly related to profit & loss account for depreciation, provisions, gain/loss etc. for the allocation of dividends & reserves in balance sheet & cash flow statement. Cash flow analysis directly based on cash concept & liquidity of the business whereas profit and loss account is based on accrual basis concept. If any expense or gain takes place whether it is paid in cash or still outstanding is shown in the profit & loss account while cash flow statement shows only cash expenses & gains. Depreciation, outstanding salary, outstanding rent, provisions, all the epenses which are outstanding in nature & not paid in cash are reflected in P & L but not in cash flow analysis. Expenses related to financing & investing activity like purchase of asset, any investment, purchase of stock etc. are not included in P&L account. Banks are interested to analyse the balance sheet Information related to debts, investments & assets which represent that company is financially sound to pay its debt & loans. Balance sheet can be further used to make future plannings of the business by purchasing such assets, investments which generate more revenue. It is used to know the current financial condition & past performance of the business. It is used for the comparision of the previous years with the current year. It can be used to comparision of financial health condition with the competitor.

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