Managing Financial Resources
The main financial statements are made up of the following; A Profit and Loss account (also known as a P&L), a Balance sheet and a Cash flow statement. These three statements are normally accompanied with a section called Notes to the accounts. It is important to remember that the financial statements are normally out of date by the time investors receive them and they are also not audited in full. Profit and Loss: The Profit and Loss statement show’s the income that a business has generated and its expenditure during a given period, this is usually a full financial year.
The profit and loss statement normally only uses the operating costs of the business and the sales of the business. It ignores the assets and long-term liabilities of the business as it’s aim is to show the profit that the company makes from its sales. Balance Sheet: The Balance sheet shows the assets, capital and the liabilities of a business. The Balance sheets information is only for a given moment in time, unlike a Profit and Loss account statement which spans a given period. The sheet shows the assets and liabilities of the business, it can also show the uses of
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A Balance sheet can also be known as a ‘Position statement’, this is due to it showing the exact financial position of a business at the time it was produced. Cash Flow Statement: The Cash Flow statement shows the differences between profit and cash. It also shows where the business gets its capital from and how it uses this capital. The Cash Flow statement is similar to the profit and loss account, as it is prepared for a given period (i. e. full financial year when thinking in terms of year end accounts).
Where as the profit and loss statement take into account depreciation and intangible assets, the Cash Flow statement just shows the flow of cash in the business through out the given period. It can be used to show how much actual money the business has, as well as how well the business has managed its income and outgoings. The cash flow statement can also be used to give an indicator of how capable the business is of meeting its financial commitments. Notes to the Accounts: The Notes to the Accounts, is an important part of any set of accounts, as they help show the full picture because of the detailed information they contain.
The information included in the Notes to the Accounts is generally that which can’t be shown in the major financial statements (this is often due to the size and detail). Normally there are two different kinds of Notes: Accounting Methods – This kind of Note, will explain the companies accounting policies and the dates of its financial year. Disclosure – This kind of Note, generally includes the more detailed information, i. e. maturity dates for long-term debts and interest rates for debt.