Financial asset management

What Story Do your Financial Statements Tell About the Value of your Business?

What Story Do your Financial Statements Tell About the Value of your Business?

Every company’s financial statements tell a story about the value of the business. That’s why the financial statements are the starting point in any appraisal of a business (commonly referred to as a business valuation).

Here is what every business owner should understand about how their financial statements impact the value of their business:

- Income Statement Analysis

- Balance Sheet Analysis

- Ratio Analysis

Income Statement Analysis:

Earning power is one of the most important elements of the value of a business. The income statement develops this story.

The income statement matches total revenues and total expenses over a period of time, and it represents the best measure of management’s ability to utilize company resources in the production of a profit. A review of the company’s one-year operating figures compared to previous year’s results and results of other companies over the same periods takes on more meaning and helps evaluate the efficiency and consistency of management’s operation of the company. These variances and trends tell a story. The story may identify increasing, decreasing, stagnant, or erratic behavior related to pricing, expense control, or marketing ability to generate sufficient sales volume.

Once variances and trends are identified, the next question is “why?” The answer to this question tells the story about management’s ability to efficiently and consistently control operations and future earning power of the company. This then tells the story about the company’s long-range viability.

Balance Sheet Analysis:

The balance sheet provides a financial picture of a company at a given point in time. It represents resources in the form of assets, liabilities, and owners’ equity that the company has available to generate sales or revenues. Understanding each balance sheet account tells the story of the company’s financial condition and ability to generate cash flows or sustain future business downturns.

The balance sheet has three major categories: assets, liabilities and equity.

Assets represent the gross book value (i.e., historical cost, not fair market value) of a business and are analyzed in terms of quality and liquidity.

Liabilities represent claims against assets and are evaluated in terms of the expected repayment source or repayment requirements and their availability as sources of financing for the company.

Equity is the difference between asset book values and liabilities. Equity tells an important story. The more equity, the more likely it is that the owners of the company will work diligently to protect the equity and repay the liabilities.

Understanding each balance sheet account provides the story on the financial condition of the company.

Ratio Analysis:

After understanding the financial statements, the data from the financial statements is used to calculate financial ratios. Financial ratios are the most well-known and widely used of financial analysis tools. Ratios are used as a comparative tool to measure a company’s performance against other companies, industry standards, or other benchmarks of performance. Financial ratios tell the story about the riskiness and solvency of a company and how it compares to other businesses in the market.

Representing the major financial analysis concepts, ratios can be grouped into the five following areas:

- Liquidity

- Leverage

- Coverage

- Profitability

- Activity

Liquidity:

Liquidity is defined as a company’s ability to meet its current obligations when they come due. It tells the story of whether the company has any assets in excess of those required for its operating needs, which is a common issue in business valuation. Liquidity is critical to the success of the company: Sufficient liquidity 1) allows the company to meet its current obligations; 2) gives the company the flexibility to grow; 3) gives the company the ability to sustain operating losses. Ratios to determine liquidity are:

- Current Ratio

- Quick (Acid Test) Ratio

Leverage:

Leverage is the use of resources to a fixed cost. Operating leverage occurs when a company has fixed cost in its overall cost structure. Financial leverage is the use of borrowed capital in the expectation of being able to use those funds to produce a return greater than the interest cost. Typical ratios used to analyze leverage are:

- Total Debt to Total Assets

- Equity to Total Assets

- Long-Term Debt to Total Capital

- Equity to total Capital

- Fixed Assets to Equity

- Debt to Equity

Coverage:

Coverage ratios measure the extent to which certain current payment obligations are met or exceeded by a measure of the company’s cash flow. Coverage ratios are:

- Times Interest Earned

- Coverage of Fixed Charges

- Various Cash Flow Coverages

Profitability:

Profitability is a measure of a company’s success in achieving its objectives. It tells the story of a company’s ability to grow, remain solvent, and repay debt. Ratios to determine profitability are:

- Return on Equity

- Return on Investment

- Return on Total Assets

- Sales/Payroll Dollar

- Sales/Full-Time Equivalent Employee

Activity:

The story of how efficiently a company uses its assets can be measured by analyzing activity ratios. Common activity ratios are:

- Accounts Receivable Turnover

- Inventory Turnover

- Sales to Net Working Capital

- Sales to Fixed Assets and Total Assets

- Accounts Payable Turnover

The income statement, balance sheet and financial ratio analysis tell the story about the value of a business. What story do your financial statements tell?

How Liabilities Assets Ratio Determines Financial Status

How Liabilities Assets Ratio Determines Financial Status

Whenever an entity, whether it is a company or an individual, wants to know exactly where they stand financially, having financial statements compiled is one of the best ways to gain this kind of insight. A key component of a financial statement is a detailed and complete accounting of the assets and the liabilities associated with the person or company in order to discover the liabilities assets ratio that they have, which can help to illuminate if the financial road they are on is leading to acquiring wealth or debt.

In addition to financial statements, a balance sheet is also a very valuable financial report, which can provide a very quick, bottom-line snap-shot of the financial stability of a company, individual or family. A balance sheet typically will include everything that is considered to be property, or current assets, which contribute to wealth building. These types of total assets include such things as stocks and bonds, equity in real estate holdings, cash on hand and other liquid assets, reliable cash flows, tools and equipment, and also intellectual property.

When looking at the liabilities column of a balance sheet, the debts and financial obligations that are currently owed to others are listed. Also, when figuring the liabilities assets ratio some accountants will include other items that are sometimes overlooked, such as pending taxes, professional licensing and required fees to stay in business, obligations entered into via contracts, and other types of arrangements that requires an eventual transfer of current assets to another party.

A simple example of formulating the ratio between liabilities and assets can be seen in looking at an individual’s particular situation. For someone who owns their own home, the picture of their current assets would include the fair market value of their home, deposits in all checking and savings accounts, the portfolio of all shares, stocks and bonds, investments in gold, silver, other coins, stamps, artwork, fine jewelry, and similar items of value that typically appreciate over time.

In addition, total assets could also include retirement funds and expected pension rights, and any type of promissory note from which they are receiving regular payments.

For individuals, other types of personal property can also be included in the listing of total assets. Some of these other assets would be things such as vehicles, boats, recreational vehicles, equipment and implements, household furnishings, and even clothing. However, these are the type of things which depreciate in value over time, and as a result, some accounting professionals will exclude such items from a balance sheet in order to provide a more accurate view of true household wealth.

When looking at the liabilities column of a balance sheet, the debts and financial obligations that are currently owed to others are listed. Also, when figuring the liabilities assets ratio some accountants will include other items that are sometimes overlooked, such as pending taxes, professional licensing and required fees to stay in business, obligations entered into via contracts, and other types of arrangements that requires an eventual transfer of current assets to another party.

How Liabilities Assets Ratio Determines Financial Status

How Liabilities Assets Ratio Determines Financial Status

Whenever an entity, whether it is a company or an individual, wants to know exactly where they stand financially, having financial statements compiled is one of the best ways to gain this kind of insight. A key component of a financial statement is a detailed and complete accounting of the assets and the liabilities associated with the person or company in order to discover the liabilities assets ratio that they have, which can help to illuminate if the financial road they are on is leading to acquiring wealth or debt.

In addition to financial statements, a balance sheet is also a very valuable financial report, which can provide a very quick, bottom-line snap-shot of the financial stability of a company, individual or family. A balance sheet typically will include everything that is considered to be property, or current assets, which contribute to wealth building. These types of total assets include such things as stocks and bonds, equity in real estate holdings, cash on hand and other liquid assets, reliable cash flows, tools and equipment, and also intellectual property.

When looking at the liabilities column of a balance sheet, the debts and financial obligations that are currently owed to others are listed. Also, when figuring the liabilities assets ratio some accountants will include other items that are sometimes overlooked, such as pending taxes, professional licensing and required fees to stay in business, obligations entered into via contracts, and other types of arrangements that requires an eventual transfer of current assets to another party.

A simple example of formulating the ratio between liabilities and assets can be seen in looking at an individual’s particular situation. For someone who owns their own home, the picture of their current assets would include the fair market value of their home, deposits in all checking and savings accounts, the portfolio of all shares, stocks and bonds, investments in gold, silver, other coins, stamps, artwork, fine jewelry, and similar items of value that typically appreciate over time.

In addition, total assets could also include retirement funds and expected pension rights, and any type of promissory note from which they are receiving regular payments.

For individuals, other types of personal property can also be included in the listing of total assets. Some of these other assets would be things such as vehicles, boats, recreational vehicles, equipment and implements, household furnishings, and even clothing. However, these are the type of things which depreciate in value over time, and as a result, some accounting professionals will exclude such items from a balance sheet in order to provide a more accurate view of true household wealth.

When looking at the liabilities column of a balance sheet, the debts and financial obligations that are currently owed to others are listed. Also, when figuring the liabilities assets ratio some accountants will include other items that are sometimes overlooked, such as pending taxes, professional licensing and required fees to stay in business, obligations entered into via contracts, and other types of arrangements that requires an eventual transfer of current assets to another party.

How to Prepare Financial Statements

How to Prepare Financial Statements

How to Prepare Financial Statements

            Within every business you can find their financial statements. A financial statement is exactly what it sounds like, a statement of someone’s financial status. Financial statements show how much money is going into a business, how much money is coming out of a business and to what accounts that money is going to. An account is a statement of financial transactions that happens to a particular area of the business, for example, a cash account records all the transactions that happen with cash in the business. It records each time cash is received by a business or each time the business gives cash out.

            There are three main financial statements: income statements, statement of retained earnings, and balance sheet. The income statement records the revenues and expenses of a business over a certain period of time. Revenue is the entire amount of income, which is the money coming into the business, before any deductions, such as taxes, is taken out. An expense is outflow of money from the business to another for its goods or services. Rent is an example of an expense. To rent a certain building for the business to operate in is an expense to that business because the business needs to give money out to the renter to use the building. Other examples of expenses to businesses are salaries expense, utilities expense, supplies expense and interest expense.

            After determining the businesses revenues and expenses, you find the net income of the business. The net income is the earnings of the business or its profit. To find this you take the total revenue and subtract from it the total expenses. This number shows how profitable the business has been over a certain period of time. If the revenue is greater than the expenses, then the business has produced a profit. If the expenses exceed the revenue, however, the business has experienced a loss and need to find a way to reduce their expenses and increase their revenue.

            Once you have found the business’ net income, you move onto the statement of retained earnings. Retained earnings are the amount of money retained by the company to reinvest into its business or to pay off any debts. To calculate this you take the retained earnings from the previous period and add to it the net income. If there is a loss, however, you subtract the net loss from the previous periods retained earnings. Next, you subtract from that number any dividends. Dividends are payments by the business to its shareholders. Once you have that number, it is your retained earnings for that period and will be used on the next period’s statement of retained earnings.

            After completing the stamen of retained earnings, you can prepare your balance sheet. A balance sheet is made up of the company’s assets, liabilities and owners’ equity. An asset is anything that the company owns that has value. It is usually something that can be sold by the company or bought by the company to make products or provide services that the company can sell. Examples of assets include cash, supplies, inventory and accounts receivable. There are also two types of assets, current and noncurrent assets. Current assets are assets that the company expects to sell within one year. Noncurrent assets are assets that they expect to take longer than one year to sell or fixed assets, which are assets that aren’t available for sale. Examples of fixed assets include supplies, equipment, or furniture. A liability is the amount of money that the business owes others. A very common liability is accounts payable. Liabilities, too, have two different types: current and noncurrent. Like assets, current liabilities are expected to be paid off in one year and noncurrent liabilities are expected to take longer than one year to pay off. This account is usually made up of all purchases made by the company through credit. They have to good from the supplier, but they still owe them the money. Lastly is owners’ equity. Owners’ equity is the capital, or net worth, of a business. It’s the money that is left over after all assets are sold and all liabilities are paid off. This money belongs to the owner.

            Once you have determined all the assets, liabilities and owners’ equity of the business, you can complete your balance sheet. You do this by making sure the assets equal the liabilities plus the owners’ equity. If they do not match, you have made an error in journalizing your transactions. To set up the balance sheet list your assets on the left side, current assets and then noncurrent assets, and liabilities and owners’ equity go on the right side. Add up each one of their balances and you the left total should match the right total.

            Financial statements are a very important way to keep track of a business’ financial status. They help show the business if they are making a profit or a loss. They also help the business know if they are journalizing their transactions correctly. Without financial statements, it is hard for a business to function.

Namely Fixed Assets and Movable Assets

Namely Fixed Assets and Movable Assets

A business is made up of many different assets. Some businesses are asset rich, and need to be in order to best serve their customers, others have very few assets. All businesses will need a range of assets in order to meet the needs of their customers. Assets can be classed in two groups, namely fixed assets and movable assets. The former includes property, while the latter includes many things such as vehicles, aircraft, marine craft, light & heavy commercial vehicles, heavy plant machinery, and so on, basically anything physical that is used in daily business operations.

Paying cash for assets can place strain on the working capital of a business. It can also reduce the future opportunities due to a lack of available funds at short notice. This is why established and new businesses often use business finance as a viable alternative to buying assets for cash, thus working capital kept in the bank and the cost of their acquisition is spread over several years. With experience in asset finance, our new business finance has consistently delivered remarkable results. Our impeccable reputation ranges from new business finance across all spectrums and sectors of the market.

PSG Konsult offers an business finance intermediary service through our Asset Finance division to clients for the acquisition of commercial movable assets.

We offer clients an independent business finance advisory and facilitative service to secure finance approval for the acquisition of commercial assets for use in the client’s business. It is a value added service that will focus on the long term value creation for a client, which includes amongst others:

Assessing the suitability of the asset acquisition for the client’s business;
Assessing the affordability of the transaction;
Following the prescribed compliance procedures;
Gathering all required documentation;
Preparing and completing a lender’s application form;
Accessing the market to source a finance product to suit the client’s needs and budget;
Liaising with our existing network depending on the field of expertise required;
Submitting all documentation to the lender;
Explaining the processing and disclosures;
Keeping the client informed on the progress of his finance application;
Obtaining acceptance on approval;
After service follow up to maintain and evaluate;
Collection assistance to the lender;

The advantages of our asset finance service: Firstly, the independent advice the intermediary offers. Secondly, our compliance procedures protect the client in terms of the service levels and ethical conduct ensuring high quality transparent advice. Thirdly, the accurate translation of the client’s needs to the lender, improves the quality of the application, and enhances the credit decision making by the lender. PSG has access to all the major financiers to obtain the best possible solution for you.

Comprehensive financial planning: The planning is focused on both the asset & liability side of your balance sheet to ensure maximum value creation!
Convenience: Because your time is valuable, we will compile the application with the necessary information on your behalf and will facilitate the negotiation with the various financial institutions.
Details of the transaction: The benefit to you is that you only have to submit the details once.
Expertise and experience – Value add! Because we have the experience we know how to structure the transaction upfront and submit the transaction to the financial institution that best suits your deal profile!
Facilitation gives you leverage! Being able to compare your current deal with another offer gives you peace of mind to make a well informed choice.
Objectivity to the deal: Because we’re non-aligned with any particular financial institution, we are in a neutral position to give the advice on the best suited transaction or deal.
Best suited finance for deal profile: Depending on the transaction or deal profile, we will approach the finance institutions we think are best suited and have the appetite for the type of transaction.

THE ADVANTAGES OF PSG KONSULT BUSINESS ASSET FINANCE

Firstly, the independent business finance advice the intermediary offers. Secondly, our business finance compliance procedures protect the client in terms of the service levels and ethical conduct ensuring high quality transparent advice. Thirdly, the accurate translation of the client’s business needs to the lender, improves the quality of the application, and enhances the credit decision making by the lender. PSG Konsult business finance has access to all the major financiers in South Africa to obtain the best possible solution for you.

Comprehensive financial planning: The planning is focused on both the asset & liability side of your balance sheet to ensure maximum value creation!
Convenience: Because your time is valuable, we will compile the application with the necessary information on your behalf and will facilitate the negotiation with the various financial institutions.
Details of the transaction: The benefit to you is that you only have to submit the details once.
Expertise and experience – Value add! Because we have the experience we know how to structure the transaction upfront and submit the transaction to the financial institution that best suits your deal profile!
Facilitation gives you leverage! Being able to compare your current deal with another offer gives you peace of mind to make a well informed choice.
Objectivity to the deal: Because we’re non-aligned with any particular financial institution, we are in a neutral position to give the advice on the best suited transaction or deal
Best suited finance for deal profile: Depending on the transaction or deal profile, we will approach the finance institutions we think are best suited and have the appetite for the type of transaction.
New business finance – it’s simple, you fill in our application forms, sit back and we do the rest.

source: http://www.psgonline.co.za/plan/business-finance.php

Namely Fixed Assets and Movable Assets

Namely Fixed Assets and Movable Assets

A business is made up of many different assets. Some businesses are asset rich, and need to be in order to best serve their customers, others have very few assets. All businesses will need a range of assets in order to meet the needs of their customers. Assets can be classed in two groups, namely fixed assets and movable assets. The former includes property, while the latter includes many things such as vehicles, aircraft, marine craft, light & heavy commercial vehicles, heavy plant machinery, and so on, basically anything physical that is used in daily business operations.

Paying cash for assets can place strain on the working capital of a business. It can also reduce the future opportunities due to a lack of available funds at short notice. This is why established and new businesses often use business finance as a viable alternative to buying assets for cash, thus working capital kept in the bank and the cost of their acquisition is spread over several years. With experience in asset finance, our new business finance has consistently delivered remarkable results. Our impeccable reputation ranges from new business finance across all spectrums and sectors of the market.

PSG Konsult offers an business finance intermediary service through our Asset Finance division to clients for the acquisition of commercial movable assets.

We offer clients an independent business finance advisory and facilitative service to secure finance approval for the acquisition of commercial assets for use in the client’s business. It is a value added service that will focus on the long term value creation for a client, which includes amongst others:

Assessing the suitability of the asset acquisition for the client’s business;
Assessing the affordability of the transaction;
Following the prescribed compliance procedures;
Gathering all required documentation;
Preparing and completing a lender’s application form;
Accessing the market to source a finance product to suit the client’s needs and budget;
Liaising with our existing network depending on the field of expertise required;
Submitting all documentation to the lender;
Explaining the processing and disclosures;
Keeping the client informed on the progress of his finance application;
Obtaining acceptance on approval;
After service follow up to maintain and evaluate;
Collection assistance to the lender;

The advantages of our asset finance service: Firstly, the independent advice the intermediary offers. Secondly, our compliance procedures protect the client in terms of the service levels and ethical conduct ensuring high quality transparent advice. Thirdly, the accurate translation of the client’s needs to the lender, improves the quality of the application, and enhances the credit decision making by the lender. PSG has access to all the major financiers to obtain the best possible solution for you.

Comprehensive financial planning: The planning is focused on both the asset & liability side of your balance sheet to ensure maximum value creation!
Convenience: Because your time is valuable, we will compile the application with the necessary information on your behalf and will facilitate the negotiation with the various financial institutions.
Details of the transaction: The benefit to you is that you only have to submit the details once.
Expertise and experience – Value add! Because we have the experience we know how to structure the transaction upfront and submit the transaction to the financial institution that best suits your deal profile!
Facilitation gives you leverage! Being able to compare your current deal with another offer gives you peace of mind to make a well informed choice.
Objectivity to the deal: Because we’re non-aligned with any particular financial institution, we are in a neutral position to give the advice on the best suited transaction or deal.
Best suited finance for deal profile: Depending on the transaction or deal profile, we will approach the finance institutions we think are best suited and have the appetite for the type of transaction.

THE ADVANTAGES OF PSG KONSULT BUSINESS ASSET FINANCE

Firstly, the independent business finance advice the intermediary offers. Secondly, our business finance compliance procedures protect the client in terms of the service levels and ethical conduct ensuring high quality transparent advice. Thirdly, the accurate translation of the client’s business needs to the lender, improves the quality of the application, and enhances the credit decision making by the lender. PSG Konsult business finance has access to all the major financiers in South Africa to obtain the best possible solution for you.

Comprehensive financial planning: The planning is focused on both the asset & liability side of your balance sheet to ensure maximum value creation!
Convenience: Because your time is valuable, we will compile the application with the necessary information on your behalf and will facilitate the negotiation with the various financial institutions.
Details of the transaction: The benefit to you is that you only have to submit the details once.
Expertise and experience – Value add! Because we have the experience we know how to structure the transaction upfront and submit the transaction to the financial institution that best suits your deal profile!
Facilitation gives you leverage! Being able to compare your current deal with another offer gives you peace of mind to make a well informed choice.
Objectivity to the deal: Because we’re non-aligned with any particular financial institution, we are in a neutral position to give the advice on the best suited transaction or deal
Best suited finance for deal profile: Depending on the transaction or deal profile, we will approach the finance institutions we think are best suited and have the appetite for the type of transaction.
New business finance – it’s simple, you fill in our application forms, sit back and we do the rest.

source: http://www.psgonline.co.za/plan/business-finance.php

Tips for Choosing a Private Asset Management/Wealth Management Firm

Tips for Choosing a Private Asset Management/Wealth Management Firm

In today’s economy, many wealthy individuals and families are looking for ways to safeguard their wealth, and a private asset management firm, wealth management firm or investment management service can help make sure that an individual’s wealth continue to grow. If you are part of a wealthy family or have worked hard to earn your own wealth, then choosing a private asset management or wealth management firm to help you safeguard and grow your investments and assets is an important step to make. Individual wealth management companies have in depth knowledge of the investment and banking industries and can give you sound investment advice to ensure that your wealth continues to grow.

Tips for Choosing a Private Asset Management/Wealth Management Firm:Why choose a private asset management/wealth management firmUsing the services of a private asset management company can help you safeguard your wealth better than making investment choices on your own because individual wealth management professionals have extensive banking and investment expertise. A private asset management firm can help you save money on taxes, asset reporting, estate planning and wealth protection. An investment management service can help you  pick the best investments that will give you the highest returns with little risk.

What do you need from your individual wealth management firm One of the first things you should do is make sure you need the services of a private asset management firm.  If you like to be in control of every financial decision that affects you, it might be a better idea to find a reputable brokerage firm to help you set up investments. There are even online brokerage services that allow you complete control of your investment decisions. A wealth management firm might be a good idea for help with other services like estate planning or asset reports and general asset management rather than investment management services.

Do you need a private asset management firm or a financial advisor  Before you sign on with a wealth management firm, take the time to research your options and make sure an individual wealth management firm is better than a private bank or financial advisor at a larger bank. Large banks may have more  resources available to help you manage your wealth, such as well-trained financial analysts on staff or state of the art trading facilities. However, the problem with large banks is that they will have an agenda in working with you, and may be biased towards their own investment or banking services.

What are the private asset management firm’s credentials You need to know the people who will be managing your assets and investments, so do some research about the firm’s members before your sign up with an individual wealth management firm. Check the credentials, education and experience of your financial advisors. Make sure that all partners in the firm are trained and qualified CPAs or CFAs because you want your wealth management team to be the best. Find out what financial institutions they work with, and make sure they will manage your wealth in the way you see fit. You should also check the banks they work with to make sure that your investments will be secure.

What type of investment management professionals should I use? The right wealth management firm or investment management service will have trained professionals on their staff. When looking for a trained private asset management professional, there are three credentials to look for: a Certified Financial Planner, a Certified Investment Management Analyst or a Chartered Financial Analyst. Each one of these certifications can only be earned by rigorous coursework and exams, and only professional financial advisors will have these designations. A Certified Financial Planner can help you create an overall financial plan for your wealth and help you with investment management services.

A Certified Investment Management Analyst is specially trained in managing money through investments and has extensive knowledge of brokering investments, using options and futures, insurance and managing money. A Chartered Financial Analyst is often called an investment manager or portfolio manager, and they earned their CFA throug h years of investment experience and several rigorous exams.

Will there be fees charged by an investment management service? Third, before you sign with a private asset management firm, make sure you read the small print. Hidden fees will often lurk in many contracts and can sneak up on the unsuspecting client. Many firms will also charge a fee to enter an investment fund, and the fee may seem low. However, an unscrupulous investment management service will suggest that you change funds often, and as a result, you will pay those small fees several times over.

Financial Reports ? Net Worth

Financial Reports ? Net Worth

A company’s financial statements indicate the amount of resources (assets) it has at its disposal and also any claims against those precious resources at a particular point in time, the difference between the two is the company’s Net Worth.

Claims upon the company’s assets can also be referred as liabilities or equities. So, a company can be known as a combination of economic resources and equities.

Regardless of what structure your business takes (sole trader, partnership or corporation), every company or business has two different types of equities. They are creditor liabilities and owner’s equity.

The main way to communicate information on how a business is performing financially, to those who have an interest in the business, is through financial statements. However, care must be taken when interpreting these as no set of financial statements is perfect and all have their flaws, the main one being they represent the position of an enterprise at a given point in time and may not reflect major changes in the financial position since that time.

There are three main financial statements:-

1. Statement of financial performance (the profit and loss statement). Reports, in summary form the revenue, expenses and profit (or loss) that has been made over a given period. The statement shows where an entity’s revenue was obtained and what expenses were incurred. This report also allows investors to evaluate the past performance of an enterprise and assess its prospects for the future, many consider this to be the most important financial report as it makes it clear whether a business has met its profitability goal.

2. Statement of financial position (balance sheet). This report is a statement of the book value (net worth) of a business at a particular point in time, listing the assets or resources controlled by the enterprise, its debts, and the owner’s claim on the equity. The key elements in the statement of financial position are assets, liabilities, net assets, shareholders’ equity, and retained earnings.

3. Statement of cash flows. Reports the effects of transactions, over a specified accounting period, that involve a flow of cash into or out of the entity and whether those transactions are of an operational, financial or investment nature.

Operating activities involve the receipts and payments for production, sale and delivery of goods and services.

Financing activities relate to the composition of the financial structure of the entity, for example borrowings and shareholding movements.

Investing activities relate to the acquisition and disposal of non-current assets such as plant and equipment or investments in other companies.

The accounting equation: Economic Resources (Assets) = Liabilities + Owners Equity.

As in all algebraic equations, both sides of the equation have to be equal. The importance of this equation becomes apparent when analyzing the financial effects of your everyday business activities.

Assets are known as the economic resources that are available to a business that are expected to generate income for the entity in the future.
Such as: real estate, buildings or other property that a business can rent, lease or use in the manufacture of goods for sale.
Stock on Hand – finished goods and components which are used in the manufacture of finished goods.
Monies owed to the business for goods or services already supplied (known as accounts receivable).
There are also some assets that are not of a physical nature, though still extremely valuable to a business, some examples are: copyrights, trademarks, patents and good will.

Liabilities are the payment obligations that a business has, such as: taxes, payroll obligations, utilities, amounts owing to other businesses for the supply of goods or services received.  These are the debts or accounts payable of a business, the monies that it will have to pay out in the near future. The law gives creditors (people that money is owed to) the right to push for the sale (liquidation) of a company’s assets if it is unable to pay its debts on time.  Creditors have greater rights over the assets of a business than owners as they have to be paid before the owners receive anything.

Owner’s equity refers to the claim that owners of a business have over the assets of the business. It is the residual interest or the remaining assets of a company after deducting the liabilities of the business. Here is the equation for owner’s equity. Owner equity = Assets – Liabilities. The owner’s equity within a particular corporation is referred as stockholders or shareholders equity.

This is made up of two distinct parts, contributed capital and retained earnings.  (Owner’s Equity = Contributed Capital + Retained Earnings). The amount that individual shareholders put into a business is known as contributed capital. Retained earnings is the amount of equity (profit) that has been earned by shareholders from the income generating activities of a business that has been kept for future uses by the business. Retained earnings are affected by three types of transactions which are revenues, expenses, and dividends.

When revenues exceed expenses it is known as net income this results in an increase in assets and hence the owner’s equity. On the other hand where expenses are greater than revenues it is known as a net loss this results in a decrease in assets and hence the owner’s equity (which means that you are losing business or your business costs more to operate than what you earn).

Dividends are the distribution of assets (income) to shareholders relating to the past earnings of the business. It is important not to confuse expenses with dividends as both reduce the retained earnings amount. Retained earnings are the collected net income or revenues minus expenses.