A financial statement is an essential part of the stock market. It defines a company’s financial position and gives information about the company. It is one of those factors that affect the stock market. This article will discuss financial statements, types of financial statements and pros and cons, and others.
We will understand the financial information and why it affects the stock market and companies’ position in the stock market. Also, how it’s useful for companies, traders, brokers, promoters. How it affects companies’ future and financial terms like profit, loss balance sheet and others. Let’s discuss below what it is:-
What is a Financial Statement?
A financial statement is a record of all the company’s activities that display a company’s performance. Why do companies need to present a financial statement? When a company is listed in the stock market, they need to regularly show performance to know more about the company before investing. The financial statement has records related to every transaction done by the company during the year. Companies submit the reports annually or every six months according to policies.
Financial companies indicate if a company is in profit or loss. If companies have debts or heavy expenses. You can know almost everything through a financial statement. Financial statements help companies plan for the future. It helps brokers decide which companies to choose. For investors, it gives a basic idea about the company. It provides a clear picture of their financial position before providing financial support to any company for banks.
So a financial statement is essential in terms of the company as future decisions depend on the company’s reports.
Types of financial statements?
There are different types of statements. Let’s discuss
Balance sheet:- Balance sheet is an annual report where assets and liability are presented. It presents all the assets and liabilities. There are physical property, profit and loss account balance, cash balance. On the Liabilities side, there is a loan, profit and loss balances and others. Generally, investors look at the balance sheet for investing in any company.
Income statements:- Income statement is the total revenue made after deducting expenses and taxes. To find actual revenue, first, we have to see total sales after deducting purchases and other expenses related to sales. Then, that balance goes to a profit and loss account as gross profit means profit before deducting the taxes and other expenses. Now in the profit and loss account, we add all the money generated from services and subtract all the costs related to operations and wear and tear.
After all this, we finally get a net profit after deducting the taxes from that amount. This balance is generally present in the balance sheet as a part of either profit or loss. Thus, it plays an essential element in defining a company’s financial position.
Cash flow statement:-Cash Flow statement is generally related to how much cash is generated by a company. Companies generate cash through operational activities like sales, investment activities like buying properties and plants and financial activities like buying stock. Investment activities are buying long term assets like property.
If a company buys machinery, it will result in cash outflow as depreciation will charge every year. For operational activities, basic activities like sales generate cash inflow while operating costs, resulting in cash outflow. All these costs are being record in a journal( daily entry for the company’s transaction).
The cash account is made to know about the total cash flow of the company. This balance is recorded in the balance sheet—one of the significant factors that affect the company’s balance sheet and financial statement.
What are the pros and cons of a financial statement?
Cash flow:- Financial Statement helps to find out the position in terms of cash. It is beneficial at times of solvency, bankruptcy when a company asks for a loan, when investors want to put money in the company and for the company to make plans. Cash flow also helps companies to figure out extra costs and expenses made by the company.
Review Liabilities:- Financial statements help to figure all the liabilities that exist for a company. It is essential before getting a loan from the bank. It helps the bank know more about the company and allows investors, promoters, and brokers to understand companies’ positions before investing in a company. And It helps the company to plan for the future.
Review of inventory:- Financial Statement gives information related to inventory. From opening stock to closing stock to all the changes, this helps determine the product’s demand and changes in trend. Information related to inventory is helpful for investors and brokers as they know about the popularity and profitability. In addition, it’s useful for companies to learn about demand for the product and if it’s not there, then what they should do is boost sales. Also, this helps to make decisions regarding product making if they need to replace or stop production or need to increase output or introduce new products.
Trends:- Financial tells a lot about current trends and the change in trends in the market. Knowledge about trends helps to know about the latest trends in the market. All this information allows companies to stay relevant in the market. For investors, it is essential to understand products and sectors that are working and not working.
Future Planning :-Financial Statements help to decide the plans for the future. Every company has some plans, goals, and a financial statement gives a clear idea about the
company’s progress. Then strategies is make according to the reports and progress to reach goals and visions.
Based on historical cost:- Everything is recorded on historical cost(Price at which that asset is bought). This thing is a big problem because the current price of that asset is unknown. This thing happens in the case of fixed assets.
Personal Judgement: The value is based on personal Judgement, especially in the case of assets, as depreciation and amortization are based on an accountant’s personal choice.
Inflation:- Inflation is high, and assets and liabilities are meagre in comparison. Therefore, we cannot adjust it in the balance sheet. It generally happens in long term assets.
Intangible assets:- Intangible assets are not recorded in a financial statement. But the costs for buying intangible assets is being record. This thing undermines the value of the business. It is common with startup companies, where they spend a lot of money to create a brand image.
Lack of non-financial terms:- Financial factors are kept in check, but the non-financial are not. This situation is a big concern as there are significant factors like the loyalty of workers, the environment in locality and others that are affecting. These factors are essential in the success, growth and failure of a company. These factors influence heavily, but they are not mention in a financial statement. Omitting these factors in a financial statement makes it less transparent.
Sometimes, the actual reason for success and failure is being known to investors or the person who is reading the statement. In addition, this factor makes things less transparent for users.
What financial statement indicates?
The financial statement indicates profit and losses, cash flows, assets and liabilities. How much profit and loss a company makes decides the value in the stock market. Decides if investors would buy shares of the company and decides the decisions regarding the company. Cash flow indicates the flow of cash for a company.
Assets and liabilities show the company’s possessions, and credits and expenses indicate all the costs the company incurs, whether it is the operational cost or non-operational. These things are pretty crucial
for company decisions and value in the stock market. Let’s discuss how the stock market and financial statements is connecting.
What’s the connection between the stock market and financial statements?
In the stock market, it is necessary to present a financial statement because it reveals its current performance and affects its valuation in the stock market.
A financial statement is a written record for a company throughout the year. The transactions is done by the company record in companies books as financial statements and statements give essential information to investors before buying and play an important factor in companies decisions. Company value gets decided in the stock market. Through financial statements, investors can know about the company and determine if they want to invest in the company.
A financial statement gives knowledge about a company’s financial position. Still, some factors like recording at historical cost and intangible and non-financial factors omitted in financial records make financial statements less transparent. These records are essential when a company wants a loan and credit from a bank. All these things are crucial, and financial statements must provide knowledge about liquidity, profit/loss and other things.
If performance is affected by multiple companies at the same time. Then the sector price falls in the share market. So the financial statement is one of the crucial factors in the share market. Lets start Learning at Forexrating Academy.