What other financial documents, besides the Profit and Loss statement, are important?
Other the Profit and Loss Statement (or P&L statement), there are other documents that are also important for a company. The P&L Statement is actually just one of the four basic financial statements required by the accounting standards and the business world. The other financial documents are the balance sheet, the statement of changes in equity and the statement of cash flows, which are explained as follows.
If the P&L Statement shows the company’s performance for a given period of time, the balance sheet shows the company’s financial position at a given point of time (usually as of December 31 of every year). If the P&L Statement is the income statement, the balance sheet is the statement of financial position. The balance sheet shows the assets of the company or those financial resources owned by a company such as its cash, receivables (amounts owed by the customers to the company), inventories, property and equipment such as land, building and machineries and any expenses paid for in advance such as rent and insurance. It also shows the liabilities of the company or what it owes to the banks, its suppliers, its employees and even its owner (through advances or unpaid dividends). Lastly, the balance sheet shows how much is the net capital of the company, which is the owner’s actual capital plus any profits or losses accumulated during the years of operations of the company.
The statement of changes in equity shows all changes in equity as of a certain period of time. These changes may be in the form of new investments from an owner, a withdrawal of capital by an owner, any dividends paid by the company to the owners and the profit or loss of the company during the same period of time.
The last important financial document is the statement of cash flows. Unlike the P&L Statement, which also shows expenses that were not actually paid by the company or revenues not yet received as cash, the statement of cash flows shows the movement of the company’s cash during a certain period of time as well as how the company’s cash balance as of the end of the same period was arrived at. This statement shows how much the company actually received from its customers, how much it actually paid to its suppliers and how much taxes it paid to the government. Through the statement of cash flows, the reader will know how much the company spent in its acquisition of new property and equipment and how much it collected when it sold any of these assets. This same statement shows the level of debt servicing of the company as it indicates how much the company paid for its loans and for its interest. It also indicates how much the company received as new loans during the period. Lastly, the statement of cash flows shows the amount of dividends paid during the period, the amount of new capital it received from its owners and the amount of capital withdrawn by the owners.