Financial Statement FAQs

  1. What are financial statements?

Answer: Financial statements are formal records of the financial activities and position of a business, person, or other entity.

  1. What are the main types of financial statements?

Answer: The main types are the balance sheet, income statement, and cash flow statement.

  1. What is a balance sheet?

Answer: A balance sheet provides a snapshot of a company’s financial position at a specific point in time, showing assets, liabilities, and equity.

  1. What is an income statement?

Answer: An income statement, also known as a profit and loss statement, shows a company’s revenue and expenses over a specific period, resulting in net profit or loss.

  1. What is a cash flow statement?

Answer: A cash flow statement shows the inflows and outflows of cash in a business over a specific period, categorized into operating, investing, and financing activities.

  1. Why are financial statements important?

Answer: They provide essential information for decision-making, help assess financial health, and are required for regulatory compliance.

  1. How often should financial statements be prepared?

Answer: Financial statements are typically prepared monthly, quarterly, and annually.

  1. What are the key components of a balance sheet?

Answer: The key components are assets, liabilities, and equity.

  1. What is the difference between current and non-current assets?

Answer: Current assets are expected to be converted into cash within one year, while non-current assets are long-term and not easily liquidated.

  1. What are liabilities on a balance sheet?

Answer: Liabilities are obligations the company owes to others, including current liabilities (due within one year) and long-term liabilities.

  1. What is equity in a balance sheet?

Answer: Equity represents the owner’s claim on the assets after all liabilities have been deducted.

  1. What is gross profit on an income statement?

Answer: Gross profit is the difference between revenue and the cost of goods sold (COGS).

  1. What is operating income?

Answer: Operating income is the profit generated from the core business operations, excluding non-operating income and expenses.

  1. What is net income?

Answer: Net income is the total profit of a company after all expenses, including taxes and interest, have been deducted from total revenue.

  1. What are operating activities in a cash flow statement?

Answer: Operating activities include cash flows from the primary revenue-generating activities of the business.

  1. What are investing activities in a cash flow statement?

Answer: Investing activities include cash flows related to the acquisition and disposal of long-term assets and investments.

  1. What are financing activities in a cash flow statement?

Answer: Financing activities include cash flows related to borrowing, repaying debt, and equity transactions.

  1. What is the significance of the notes to financial statements?

Answer: The notes provide additional information and context to the financial statements, including accounting policies and detailed explanations of specific items.

  1. What is EBITDA?

Answer: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and is a measure of a company’s operating performance.

  1. How can financial statements be used for business decision-making?

Answer: Financial statements provide insights into profitability, liquidity, and solvency, helping managers make informed decisions about operations, investments, and financing.