Financial Statements: Why Companies Have Financial Statements

There are many reasons why a business may need or want financial statements. Unfortunately, when a business contacts their accountant or CPA, it’s often not just a wish but a pressing need. This may be because there was a request from an investor or bank that is willing to provide a loan. There may be a limited window of opportunity that must be met in order to obtain the requested financing.

So let’s digress when a company doesn’t have a pressing need and answer why they would have financial statements.

Financial statements can be used to measure the financial health of your business in many ways. Standard financial statements have three components, each of which can help ensure a different aspect of the company’s financial health. After all, you wouldn’t want to go to a doctor if you were limited to just one test.

The first component of a set of financial statements is the balance sheet. The balance sheet shows the assets, liabilities, and net worth of the company. There is a familiar formula that accounting students know that explains how the balance is kept on the balance sheet. Briefly though the balance sheet will result in the owners knowing the equity in the business. So if they started by investing $100,000 in the business and the capital is higher or lower, they know how far they’ve come and where they are now.

The second component of financial statements is the income statement. This shows over a period of time if there was a profit or loss. Depending on the type of business, this can be completed in a single-step or multi-step format.

The last part is the Statement of Cash Flows. As the name implies, it shows how the business has been affected by cash and whether or not its cash position has improved.