The following points highlight the four main components of financial statements. The main components are 1. Balance Sheet 2. Income Statement 3. Statement of Changes in Owners’ Equity 4. Statement of Changes in Financial Position.
Financial Statements Component # 1. Balance Sheet:
The American Institute of Certified Public Accountants defines Balance Sheet as, “A tabular statement of summary of balances (debits and credits) carried forward’ after an actual and constructive closing of books of account and kept according to principles of accounting.'” The purpose of the balance sheet is to show the resources that the company has, i.e., its assets, and from where those resources come from, i.e. its liabilities and investments by owners and outsiders.
The balance sheet is one of the important statements depicting the financial strength of the concern. It shows on the one hand the properties that it utilizes and on other hand the sources of those properties. The balance sheet shows all the assets owned by the concern and all the liabilities and claims it owes to owners and outsiders. The balance sheet is prepared on a particular date.
ADVERTISEMENTS:
The right hand side shows properties and assets. Normally there is no particular sequence for showing various assets and liabilities. The Companies Act, 1956 has prescribed a particular form for showing assets and liabilities in the balance sheet for companies registered under this act. These companies are also required to give figures for the previous year along with the current year’s figures.
Financial Statements Component # 2. Income Statement (Or Profit and Loss Account):
Income statement is prepared to determine the operational position of the concern. It is a statement of revenues earned and the expenses incurred for earning that revenue. If there is excess of revenues over expenditures it will show a profit and if the expenditures are more than the income then there will be a loss. The income statement is prepared for a particular period, generally a year. When income statement is prepared for the year ending on 31st December 2011 then all revenues and expenditures falling due in that year will be taken into account irrespective of their receipt or payment.
The income statement may be prepared in the form of a Manufacturing Account to find out the cost of production, in the form of Trading Account to determine gross profit or gross loss, in the form of a Profit and Loss Account to determine net profit or net loss. A statement of Retained Earnings may also be prepared to show the distribution of profits.
Financial Statements Component # 3. Statement of Changes in Owners’ Equity (Or Retained Earnings):
The term ‘owners equity’ refers to the claims of the owners of the business (shareholders) against the assets of the firm.
It consists of two elements:
(i) Paid -up share capital, i.e. the initial amount of funds invested by the shareholders; and
ADVERTISEMENTS:
(ii) Retained earnings/ reserves and surplus representing undistributed profits
The statement of changes in owners’ equity simply shows the beginning balance of each owner’s equity account, the reasons for increases and decreases in each, and its ending balance. However, in most cases, the only owner’s equity account that changes significantly is Retained Earnings and hence the statement of changes in owners’ equity becomes merely a statement of retained earnings.
A statement of retained earnings is also known as Profit and Loss Appropriation Account or Income Disposal Statement. As the name suggests it shows appropriations of earnings. The previous sear’s balance is first brought forward. The net profit during the current year is added to this balance.
On the debit side, appropriations like interim dividend paid, proposed dividend on preference and equity share capital, amounts transferred to debenture redemption fund, capital redemption funds, general reserve, etc. are shown. The balance in this account will show the amount of profit retained in hand and carried forward. The appropriations cannot be more than the profits so this account will not have a debit balance. There cannot be appropriations without profits.
Financial Statements Component # 4. Statement of Changes in Financial Position:
The basic financial statements, i.e., the balance sheet and the profit and loss account or income statement of a business reveal the net effect of the various transactions on the operational and financial position of the company. The balance sheet gives a static view of the resource of a business and the uses to which these resources have been put at a certain point of time.
The profit and loss account in a general way, indicates the resources provided by operations. But there are many transactions that do not operate through profit and loss account. Thus, for a better understanding another statement called statement of changes in financial position has to be prepared to show the changes in assets and liabilities from the end of one period to the end of another point of time. The objective of this statement is to show the movement of funds (working capital or cash) during a particular period.
The statement of changes in financial position may take any of the following two forms:
(a) Funds Flow Statement:
ADVERTISEMENTS:
The funds flow statement is designed to analyze the changes in the financial condition of a business enterprise between two periods. The word ‘Fund’ is used to denote working capital. This statement will show the sources from which the funds are received and the uses to which these have been put. This statement enables the management to have an idea about the sources of funds and their uses for various purposes. This statement helps the management in policy formulation and performance appraisal.
(b) Cash Flow Statement:
A statement of changes in the financial position of a firm on cash basis is called Cash Flow Statement. It summarizes the causes of changes in cash position of a business enterprise between dates of two balances sheets. This statement is very much similar to the statement of changes in working capital, i.e., funds flow statement. A cash flow statement focuses attention on cash changes only it describes the sources of cash and its uses.
Related Articles:What Is a Financial Plan?
A financial plan is a comprehensive statement of an individual's long-term objectives for security and well-being and a detailed savings and investing strategy for achieving those objectives. A financial plan may be created independently or with the help of a certified financial planner. In either case, it begins with a thorough evaluation of the individual's current financial state and future expectations.
Understanding the Financial Plan
Whether you're going it alone or with a financial planner, the first step in the creation of a financial plan involves getting together a lot of bits of paper or, more likely these days, cutting and pasting numbers from various web-based accounts into a document or spreadsheet.
Key Takeaways
The following steps in creating a financial plan may, of course, be completed by an individual or a couple.
Calculating Net Worth
You're about to learn your current net worth. List all of the following:
Your total assets, minus your total liabilities, equals your current net worth.
Determining Cash Flow
You can't create a financial plan without knowing where your money is going every month now. Documenting it will help you see how much you need every month for necessities, how much might be left for saving and investing, and even where you can cut back a little (or a lot).
One way to get this done is to skim through your checking account and credit card statements. Collectively, they should be a fairly complete history of your spending. If your expenses vary a lot seasonally, it's best to go through an entire year, count up all the expenditures in each category, and then divide by 12 to get an average monthly estimate of your spending. This way, you won't underestimate or overestimate what you spend on utilities, or forget to account for holiday gifts or a vacation.
The main elements of a financial plan include:
Document how much you've paid over a year in basic housing expenses like rent or mortgage payments, utilities, credit card interest, and even home furnishings. Add categories for food, clothing, transportation, medical insurance, and non-covered medical expenses. Document your real spending on entertainment, dining out, and vacation travel. Don't overlook cash withdrawals that may be used on sundries from shampoo to sodas.
As you look over your own financial records, your personal spending categories will stand out. You may have an expensive hobby or a pampered pet. Document the costs.
Once you add up all these numbers for a year and then divide by 12, you'll know exactly what your cash flow has been.
Considering Your Priorities
The core of a financial plan is a person's clearly defined goals. They may include funding a college education for the children, buying a larger home, starting a business, retiring on time, or leaving a legacy.
No one can tell you how to prioritize these goals.
However, a professional financial planner may be able to help you choose a detailed savings plan and specific investments that will help you tick them off, one by one.
The Fundamentals of Financial PlansSpecial Considerations of a Financial Plan
Financial plans don't have a set template. A licensed financial planner will be able to create one that fits you and your expectations. It may prompt you to make changes in the short-term that will help ensure a smooth transition through life's financial phases.
The following elements should be addressed, and revised as necessary:
Strategic plans can come in many different shapes and sizes, but they all have the following components. The list below describes each piece of a strategic plan in the order that they’re typically developed.
Opinions expressed by Entrepreneur contributors are their own.
Generally, there are seven major components that make up a business plan. They are:
1. Executive summary
2. Business description
3. Market strategies
4. Competitive analysis
5. Design and development plans
6. Operations and management plans
7. Financial factors
Once the product, market, and operations have been defined, you need to address the real backbone of the business plan -- the financial statements. The set of financial statements that you'll need to develop include the income statement, the cash-flow statement, and the balance sheet.
The Income Statement
The income statement is a simple and straightforward report on the proposed business's cash-generating ability. It is a score card on the financial performance of your business that reflects when sales are made and when expenses are incurred. It draws information from the various financial models developed earlier such as revenue, expenses, capital (in the form of depreciation), and cost of goods. By combining these elements, the income statement illustrates just how much your company makes or loses during the year by subtracting cost of goods and expenses from revenue to arrive at a net result -- which is either a profit or a loss.
For a business plan, the income statement should be generated on a monthly basis during the first year, quarterly for the second, and annually for each year thereafter. It is formed by listing your financial projections in the following manner:
1. Income -- Includes all the income generated by the business and its sources.
Note that the break-down process doesn't return exactly all of the materials a round was made of, so it is wise to avoid unnecessary ammunition processing.
![]()
2. Cost of goods -- Includes all the costs related to the sale of products in inventory.
3. Gross profit margin -- The difference between revenue and cost of goods. Gross profit margin can be expressed in dollars, as a percentage, or both. As a percentage, the GP margin is always stated as a percentage of revenue.
4. Operating expenses -- Includes all overhead and labor expenses associated with the operations of the business.
5. Total expenses -- The sum of all overhead and labor expenses required to operate the business.
6. Net profit -- The difference between gross profit margin and total expenses, the net income depicts the business's debt and capital capabilities.
7. Depreciation -- Reflects the decrease in value of capital assets used to generate income. Also used as the basis for a tax deduction and an indicator of the flow of money into new capital.
8. Net profit before interest -- The difference between net profit and depreciation.
9. Interest -- Includes all interest derived from debts, both short-term and long-term. Interest is determined by the amount of investment within the company.
10. Alien power cell fallout 3 mods. Net profit before taxes -- The difference between net profit before interest and interest.
11. Taxes -- Includes all taxes on the business.
12. Profit after taxes -- The difference between net profit before taxes and the taxes accrued. Profit after taxes is the bottom line for any company.
Following the income statement is a short note analyzing the statement. The analysis statement should be very short, emphasizing key points within the income statement.
Cash-Flow Statement
The cash-flow statement is one of the most critical information tools for your business, showing how much cash will be needed to meet obligations, when it is going to be required, and from where it will come. It shows a schedule of the money coming into the business and expenses that need to be paid. The result is the profit or loss at the end of the month or year. In a cash-flow statement, both profits and losses are carried over to the next column to show the cumulative amount. Keep in mind that if you run a loss on your cash-flow statement, it is a strong indicator that you will need additional cash in order to meet expenses.
Like the income statement, the cash-flow statement takes advantage of previous financial tables developed during the course of the business plan. The cash-flow statement begins with cash on hand and the revenue sources. The next item it lists is expenses, including those accumulated during the manufacture of a product. The capital requirements are then logged as a negative after expenses. The cash-flow statement ends with the net cash flow.
The cash-flow statement should be prepared on a monthly basis during the first year, on a quarterly basis during the second year, and on an annual basis thereafter. Items that you'll need to include in the cash-flow statement and the order in which they should appear are as follows:
1. Cash sales -- Income derived from sales paid for by cash.
![]()
2. Receivables -- Income derived from the collection of receivables.
3. Other income -- Income derived from investments, interest on loans that have been extended, and the liquidation of any assets.
4. Total income -- The sum of total cash, cash sales, receivables, and other income.
5. Material/Merchandise -- The raw material used in the manufacture of a product (for manufacturing operations only), the cash outlay for merchandise inventory (for merchandisers such as wholesalers and retailers), or the supplies used in the performance of a service.
6. Production labor -- The labor required to manufacture a product (for manufacturing operations only) or to perform a service.
7. Overhead -- All fixed and variable expenses required for the production of the product and the operations of the business.
8. Marketing/Sales -- All salaries, commissions, and other direct costs associated with the marketing and sales departments.
9. R&D -- All the labor expenses required to support the research and development operations of the business.
10. G&A -- All the labor expenses required to support the administrative functions of the business.
11. Taxes -- All taxes, except payroll, paid to the appropriate government institutions.
12. Capital -- The capital required to obtain any equipment elements that are needed for the generation of income.
13. Loan payment -- The total of all payments made to reduce any long-term debts.
14. Total expenses -- The sum of material, direct labor, overhead expenses, marketing, sales, G&A, taxes, capital, and loan payments.
15. Cash flow -- The difference between total income and total expenses. This amount is carried over to the next period as beginning cash.
16. Cumulative cash flow -- The difference between current cash flow and cash flow from the previous period.
As with the income statement, you will need to analyze the cash-flow statement in a short summary in the business plan. Once again, the analysis statement doesn't have to be long and should cover only key points derived from the cash-flow statement.
The Balance Sheet
The last financial statement you'll need to develop is the balance sheet. Like the income and cash-flow statements, the balance sheet uses information from all of the financial models developed in earlier sections of the business plan; however, unlike the previous statements, the balance sheet is generated solely on an annual basis for the business plan and is, more or less, a summary of all the preceding financial information broken down into three areas:
1. Assets
2. Liabilities
3. Equity
To obtain financing for a new business, you may need to provide a projection of the balance sheet over the period of time the business plan covers. More importantly, you'll need to include a personal financial statement or balance sheet instead of one that describes the business. A personal balance sheet is generated in the same manner as one for a business.
As mentioned, the balance sheet is divided into three sections. The top portion of the balance sheet lists your company's assets. Assets are classified as current assets and long-term or fixed assets. Current assets are assets that will be converted to cash or will be used by the business in a year or less. Current assets include:
1. Cash -- The cash on hand at the time books are closed at the end of the fiscal year. This refers to all cash in checking, savings, and short-term investment accounts.
2. Accounts receivable -- The income derived from credit accounts. For the balance sheet, it is the total amount of income to be received that is logged into the books at the close of the fiscal year.
What Are The Components Of A Financial Plan
3. Inventory -- This is derived from the cost of goods table. It is the inventory of material used to manufacture a product not yet sold.
4. Total current assets -- The sum of cash, accounts receivable, inventory, and supplies.
Other assets that appear in the balance sheet are called long-term or fixed assets. They are called long-term because they are durable and will last more than one year. Examples of this type of asset include:
1. Capital and plant -- The book value of all capital equipment and property (if you own the land and building), less depreciation.
2. Investment -- All investments by the company that cannot be converted to cash in less than one year. For the most part, companies just starting out have not accumulated long-term investments.
3. Miscellaneous assets -- All other long-term assets that are not 'capital and plant' or 'investments.'
4. Total long-term assets -- The sum of capital and plant, investments, and miscellaneous assets.
5. Total assets -- The sum of total current assets and total long-term assets.
After the assets are listed, you need to account for the liabilities of your business. Like assets, liabilities are classified as current or long-term. If the debts are due in one year or less, they are classified as a current liabilities. If they are due in more than one year, they are long-term liabilities. Examples of current liabilities are as follows:
1. Accounts payable -- All expenses derived from purchasing items from regular creditors on an open account which are due and payable.
2. Accrued liabilities -- All expenses incurred by the business which are required for operation but have not been paid at the time the books are closed. These expenses are usually the company's overhead and salaries.
3. Taxes -- These are taxes that are still due and payable at the time the books are closed.
4. Total current liabilities -- The sum of accounts payable, accrued liabilities, and taxes.
Long-term liabilities include:
What Are The Components Of A Financial Plan Free
1. Bonds payable -- The total of all bonds at the end of the year that are due and payable over a period exceeding one year.
2. Mortgage payable -- Loans taken out for the purchase of real property that are repaid over a long-term period. The mortgage payable is that amount still due at the close of books for the year.
3. Notes payable -- The amount still owed on any long-term debts that will not be repaid during the current fiscal year.
Example Of A Financial Plan
4. Total long-term liabilities -- The sum of bonds payable, mortgage payable, and notes payable.
5. Total liabilities -- The sum of total current and long-term liabilities.
Once the liabilities have been listed, the final portion of the balance sheet -- owner's equity -- needs to be calculated. The amount attributed to owner's equity is the difference between total assets and total liabilities. The amount of equity the owner has in the business is an important yardstick used by investors when evaluating the company. Many times it determines the amount of capital they feel they can safely invest in the business.
In the business plan, you'll need to create an analysis statement for the balance sheet just as you need to do for the income and cash-flow statements. The analysis of the balance sheet should be kept short and cover key points about the company.
Comments are closed.
|
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |